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Modern  Business 

A  SERIES    OF    EIGHTEEN    TEXTS,  ESPECIALLY  PREPARED 

FOR  THE   ALEXANDER   HAMILTON   INSTITUTE   COURSE   IN 

ACCOUNTS,  FINANCE  AND  MANAGEMENT 

EDITED  BY 

JOSEPH   FRENCH   JOHNSON 

DBXN,  mew  YORK  UKIVEItSITY  SCHOOL  Of  COMMERCE,  ACCOUNTS  AND  FINANCE 

Titles  Authors 

ECONOMICS  OF  BUSINESS     .     .     .     Edward  Sherwood  Meade 
ORGANIZATION  AND  MANAGEMENT  Lee  Galloway 
xMARKETING  methods     .     .     .     .     R.  S.  Butler 

SALESMANSHIP f  Herbert  F.  DeBower 

I  John  G.  Jones 

ADVERTISING (  ^^^^^  ^^^^f-f 

I  George  B.  Hotchkiss 

CORRESPONDENCE George  B.  Hotchkiss 

CREDITS Peter  P.  Wahlstad 

TRAFFIC Philip  B.  Kennedy 

ACCOUNTING  PRACTICE  .     .     .     .  /  Leo  Greendlinger 

L  J.  William  Schulze 

AUDITING Seymour  Walton 

COST  FINDING Dexter  S.  Kimball 

CORPORATION  FINANCE  ....     William  H.  Lough 
RANKTNP  r  Joseph  French  Johnson 

I  Howard    M.    Jefferson 

FOREIGN  EXCHANGE Franklin  Escher 

Thomas  Conwat 


INVESTMENT  AND  SPECULATION  .  ,  . 

Albert  W.  Atwood 

INSURANCE Edward  R.  Hardy 

REAL  ESTATE Walter  Lindner 

(Charles  W.  Gersten 
berg 
Thomas  W.  Hughes 


ALEXANDER  HAMILTON  INSTITUTE 
NEW  YORK 


A  PRACTICAL  EXPOSITION  OF  THE 
SCIENCE  OF  BUSINESS,  WITH  ILLUS- 
TRATIONS FROM  ACTUAL  EXPERIENCE 


BY 

EDWARD  SHERWOOD  MEADE 

PROFESSOR  OF  FINANCE  IN  THE  WHARTON  SCHOOL 
OF  FINANCE  AND  COMMERCE,  UNIVERSITY  OF  PENN- 
SYLVANIA;    AUTHOR    OF    "TRUST    FINANCE."    "THE 
STORY  OF  COLD."  ETC. 


Modern  Business 
Volume  I 


ALEXANDER  HAMILTON   INSTITUTE 
NEW  YORK 


COPTRIGHT,    1911,    BT 

ALEXANDER  HAMILTON   INSTITUTE 

Copyright,  1912,  by 
ALEXANDER  HAMILTON  INSTITUTE 

Copyright,  1913,  by 
ALEXANDER  HAMILTON   INSTITUTE 

Copyright,  1914,  by 
ALEXANDER   HAMILTON   INSTITUTE 

Copyright,  1916.  by 
ALEXANDER  HAMILTON  INSTITUTE 


EDITOR'S    PREFACE 

"Modern  Business"  is  a  pioneer  work  in  its  field.  Its 
authors,  who  are  authorities  and  university  speciahsts, 
have  aimed  in  these  twelve  volumes  to  apply  scientific 
methods  in  the  discussion  of  various  phases  of  business 
and  at  the  same  time  to  be  so  practical  and  clear,  and  so 
copious  with  illustrations,  that  their  ideas  shall  be  read- 
ily understood  by  every  man  of  ordinary  intelligence. 
They  should  appeal  to  the  mature  man  already  engaged 
in  business,  for  they  cover  many  subjects  with  which  he 
cannot  be  at  first  hand  familiar;  and  to  the  young  man 
looking  forward  to  a  business  career,  for  they  will  give 
him  a  helpful  grasp  of  underlying  principles  and  a  most 
useful  knowledge  of  modern  practice. 

The  volumes  of  "Modern  Business,"  it  should  be 
clearly  understood,  are  not  designed  to  cover  thoroughly 
and  in  detail  every  point  that  ought  to  be  included  in  a 
study  of  present-day  business;  they  constitute  but  one 
feature  of  the  comprehensive  course  of  reading  in 
business  as  a  part  of  which  these  volumes  are  here  pre- 
sented. The  function  of  the  text-books  in  this  course  is 
to  present  clearly  the  basic  principles  of  each  subject  dis- 
cussed. Applications  of  principles,  concrete  questions, 
technical  details,  are  largely  left  to  be  treated  in  other 
features  of  the  course.  We  may  say,  however,  that  the 
books  alone  contain— for  the  man  who  studies  them 
properly— the  fundamentals  of  a  university  education 
in  the  science  and  art  of  business.  In  this  brief  intro- 
duction I  cannot  give  space  to  a  full  treatment  of  all 

347633 


vi  ECONOMICS 

the  features  of  the  complete  course,  and  I  shall  there- 
fore confine  myself  to  a  brief  review  of  the  char- 
acteristics and  purposes  of  the  '*  Modern  Business  " 
series. 

It  is  only  during  the  last  few  decades  that  business 
has  been  recognized  as  a  science  worthy  the  attention  of 
speciahsts.  Many  doctrinaire  political  economies  have 
been  written,  but  these  in  the  main  have  sought  to  ex- 
plain, not  the  actual  phenomena  of  the  business  world, 
but  the  phenomena  of  an  imaginary,  hypothetical  world 
in  which  all  men  were  supposed  to  be  actuated  solely  by 
economic  or  material  considerations.  Such  classic  writ- 
ers as  Adam  Smith,  David  Ricardo,  and  John  Stuart 
Mill  performed  a  great  service  for  humanity,  for  they 
called  attention  to  certain  truths  which  must  always  pre- 
vail so  long  as  human  nature  is  unchanged;  but  their 
service  lies  largely  in  the  field  of  pure  economics  rather 
than  in  that  of  applied  or  practical  economics.  Our 
great  economists  did  not  seek  to  explain  the  actual  phe- 
nomena of  every-day  life.  Their  interests  lay,  not  in 
the  science  of  business,  but  in  social  or  national  econ- 
omy. As  a  result  their  works,  although  possessing 
great  scientific  value,  seem  far  removed  from  the  affairs 
which  interest  the  practical  business  man. 

The  volumes  of  "Modem  Business,"  on  the  other 
hand,  are  directly  concerned  with  the  problems  which  the 
business  man  is  called  upon  daily  to  solve.  They  treat 
specifically  of  the  science  and  art  of  business.  The 
problems  involved  in  the  more  general  science  of  so- 
called  political  or  national  economy  they  discuss  only 
in  so  far  as  light  is  thereby  thrown  upon  actual  transac- 
tions. These  twelve  volumes,  from  a  scientific  point  of 
view,  all  belong  in  the  same  field,  each  discussing  a 
separate  set  of  business  phenomena.   Could  their  con- 


EDITOR'S  PREFACE  vii 

tents  be  condensed  into  a  single  volume,  it  would  be  a 
complete  syllabus  or  outline  of  the  science  of  business 
in  all  its  phases  and  practical  applications.  It  must 
not  be  supposed,  however,  that  the  writers  ignore  the 
teachings  of  the  older  economists.  On  the  contrary, 
those  teachings,  in  so  far  as  they  are  applicable  to-day, 
are  here  given  emphasis  and  fresh  illustration. 

While  the  twelve  volumes  may  be  regarded  as  a  unit, 
nevertheless  each  volume  is  complete  in  itself  and  may 
be  studied  independently  of  the  rest.  The  volume  on 
"Economics,"  for  example,  is  a  general  introduction  to 
the  course  and  touches  upon  almost  all  the  questions 
raised  in  the  other  volumes.  The  volumes  on  "Corpora- 
tion Finance"  and  "Investment  and  Speculation"  treat 
of  kindred  subjects,  but  from  different  points  of  view. 
The  same  may  be  said  of  the  volimie  on  "Banking." 
The  two  volumes  on  accounting  could  not  be  read  to 
advantage  by  a  man  ignorant  of  the  subject  unless  he 
began  with  Volume  VI,  entitled  "Accounting  Prac- 
tice," in  which  the  elements  of  the  subject  are  first 
given.  The  volumes  which  treat  of  Salesmanship,  Ad- 
vertising, Insurance,  Real  Estate  and  Commercial  Law 
can  be  understood  by  any  reader  without  reference  to 
other  volumes. 

In  order  that  each  volume  might  possess  independent 
unity  and  be  complete  in  itself,  as  the  reader  will  dis- 
cover, certain  important  topics  are  discussed  in  two  or 
more  volumes.  For  example,  the  modern  methods  of 
speculation  in  stocks  are  explained  in  "Corporation  Fi- 
nance" and  again,  but  in  greater  detail,  in  "Investment 
and  Speculation,"  just  as  in  the  volume  on  "Economics" 
certain  types  of  business  organization  are  mentioned 
which  the  reader  will  find  described  more  fully  in  Vol- 
ume II.     The  editor  permitted  important  subjects  to 


viii  ECONOMICS 

be  covered  twice  because  he  deemed  it  important  that 
each  book  should  be  complete  in  itself,  and  desirable 
that  the  reader  should  approach  certain  questions  from 
two  different  viewpoints. 

Within  the  last  few  years  many  of  the  leading  uni- 
versities of  the  United  States,  including  Harvard,  New 
York  University,  University  of  Wisconsin,  University 
of  Michigan,  University  of  Illinois  and  the  University 
of  Pennsylvania,  have  established  schools  of  commerce 
in  which  they  aim  to  give  young  men  a  thorough  train- 
ing in  the  principles  of  business.  Their  work  is  based 
on  the  belief  that  through  a  study  of  commercial  meth- 
ods and  economic  forces  a  young  man  may  get  valuable 
mental  discipline  and  at  the  same  time  acquire  the  tech- 
nical knowledge  and  the  habits  that  make  for  efficiency 
and  success  in  business.  These  schools  of  commerce 
have  been  the  outgrowth  of  a  popular  demand  for  in- 
struction of  the  sort  they  give,  and  the  large  number  of 
students  they  have  enrolled  is  evidence  that  the  people 
of  the  United  States  realize  the  importance  of  intellec- 
tual training  as  a  preparation  for  business  careers.  It 
has  long  been  acknowledged  that  a  man  who  chooses  the 
career  of  a  physician,  of  a  civil  or  mechanical  engineer, 
of  an  architect,  or  of  a  dentist,  must  prepare  himself 
for  his  work  by  devoting  several  years  to  study  in  the 
schools  and  universities.  Now  it  is  known  that  the 
young  man  who  chooses  a  career  as  a  banker,  or  certi- 
fied public  accountant,  or  stock-broker,  or  bond-dealer, 
or  fire  or  life  insurance  agent,  or  journalist,  or  real  es- 
tate dealer,  or  manufacturer,  ought  in  the  beginning  to 
learn  by  study  all  that  is  possible  from  the  experience  of 
others.  In  other  words,  many  of  our  business  careers 
have  become  professional  in  their  character,  requiring 


EDITOR'S  PREFACE  is 

a  training  of  the  intellect  quite  as  much  as  the  older  pro- 
fessions. It  is  for  this  purpose  that  our  schools  of  com- 
merce have  been  established  and  are  now  enrolling 
large  numbers  of  students. 

But  not  all  men  can  attend  these  schools  of  com- 
merce. Many  a  young  man  is  earning  a  living  in  his 
native  town  at  a  distance  from  a  university  and  without 
the  means  to  go  to  it.  Furthermore,  there  are  thou- 
sands of  older  men — including  many  of  high  ability — 
who  realize  the  deficiencies  of  their  early  training  and 
regret  that  they  have  no  opportunity  to  get  the  educa- 
tion which  they  could  not  or  did  not  get  in  their  youth. 
Most  ambitious  men  of  this  kind  have  families  to  sup- 
port and  are  tied  down  to  a  particular  location.  It  is 
for  men  of  this  sort  that  are  distant  from  universities, 
or  whose  daily  employment  prevents  their  attendance 
upon  university  schools,  that  these  volumes  have  been 
prepared.  The  authors,  who  are  experienced  univer- 
sity teachers,  have  aimed,  above  all,  at  comprehensive- 
ness and  clearness,  in  order  that  no  reader  of  intelli- 
gence might  be  puzzled.  They  have  aimed  also  to  de- 
velop each  subject  in  such  logical  fashion  and  to  illus- 
trate all  points  so  clearly  that  every  reader  who  con- 
scientiously follows  directions  and  does  the  work  out- 
lined for  him  shall  not  fail  to  arrive  at  an  intelligent 
understanding  of  each  of  the  subjects. 

The  volume  on  "Economics"  the  reader  will  find  is 
the  keystone  of  the  business  arch.  A  man  who  does  not 
understand  the  science  of  business  can  never  have  a  thor- 
ough and  comprehensive  grasp  of  any  single  business. 
This  subject  underlies  all  business  just  as  mathematics 
underlies  all  engineering  vocations.  It  is  the  founda- 
tion subject  and  should  be  studied  first  of  all.  Its  pur- 
pose is  to  bring  before  the  reader  a  clear  idea  of  the 


X  ECONOMICS 

business  problems  which  economists  have  sought  to  solve 
and  to  make  him  able  to  read  the  scientific  literature  of 
the  subject  intelligently.  It  explains  the  laws  govern- 
ing the  price  of  goods,  the  wages  and  salaries  of 
employes,  the  profits  or  net  earnings  of  employers,  in- 
cluding both  individuals  and  corporations,  the  rate  of  in- 
terest, and  the  rent  of  buildings  and  land.  It  discusses 
in  comprehensive  style  the  perplexing  problems  raised 
by  trade  unions,  by  the  capitalistic  combinations  called 
trusts,  by  natural  monopolies,  by  the  tariff,  and  by  the 
state  regulation  of  railways.  In  fact,  in  this  first  vol- 
ume the  student  will  find  that  light  is  thrown  upon  most 
of  the  questions  raised  in  the  succeeding  volumes. 

Two  volumes  are  devoted  to  accounting.  Volume 
VI  on  "Accounting  Practice"  elucidates  the  principles 
of  the  subject  and  gives  to  the  reader  the  guidance  he 
needs  in  training  himself  for  the  solution  of  difficult 
practical  problems.  Of  particular  interest  is  the  discus- 
sion of  bookkeeping  principles,  of  partnership  and 
corporation  forms  and  accounts,  and  of  accounting  for 
intangible  expenditures  and  assets. 

Volume  VII  is  in  part  devoted  to  the  important  work 
of  the  auditor,  stating  the  principles  which  determine 
the  correctness  and  completeness  of  an  audit  and  giving 
concrete  illustrations  of  the  proper  method  to  pursue 
in  the  audit  of  different  businesses.  The  important  sub- 
ject of  costs,  which  is  treated  in  the  other  half  of  the 
volume,  cannot  be  studied  too  carefully  by  anyone  who 
is  even  remotely  interested  in  manufacturing — and  this 
includes  bankers,  wholesalers,  accountants,  and  many 
others. 

While  these  two  volumes  on  accounting  contain 
much  more  information  about  accounts  than  is  pos- 
sessed by  the  average  business  man  in  the  United  States, 


EDITOR'S  PREFACE  xi 

nevertheless  every  business  man  who  is  trying  to  in- 
crease his  efficiency  and  earning  power  ought  to  im- 
prove every  opportunity  of  getting  a  grasp  of  the  whole 
subject.  If  he  engages  in  the  manufacturing  business, 
his  knowledge  of  cost  finding  will  be  a  telling  advan- 
tage. If  he  is  a  banker,  his  understanding  of  the  prin- 
ciples and  proper  methods  of  auditing  and  of  accounts 
in  general  will  promote  his  interests.  In  fact,  in  every 
field  of  business  the  man  who  understands  the  science  of 
accounts  and  can  solve  its  most  difficult  problems,  has  a 
great  advantage  over  one  who  has  merely  a  knowledge 
of  routine  bookkeeping. 

The  three  volumes  which  treat  of  finance  cover  both 
the  theoretical  and  the  practical  phases  of  the  subject. 
The  volume  on  "Corporation  Finance"  describes  the 
sources  from  which  corporations  obtain  their  funds  and 
the  methods  which  they  employ.  This  volume  is  prac- 
tical and  descriptive  and  can  be  understood  by  a  reader 
who  has  had  no  previous  training  in  finance. 

The  volume  on  "Banking"  expounds  the  fundamen- 
tal principles  underlying  all  financial  operations,  and 
is  intended  to  give  the  business  man  a  more  intimate 
knowledge  of  the  important  factors  in  his  relations  with 
banks  and  the  foreign  exchange  market.  The  volume 
on  "Investment  and  Speculation"  is  designed  for  the 
especial  benefit  of  men  employed  in  stock  and  bond 
houses.  It  describes  the  methods  of  the  stock  exchange 
and  explains  the  transactions  and  processes  of  that  great 
financial  market  known  as  Wall  Street.  A  student  who 
faithfully  masters  the  contents  of  these  three  volumes 
on  finance,  even  though  he  were  born  and  bred  in 
the  country,  would  enter  Wall  Street  with  a  much 
clearer  idea  of  its  possibilities  and  its  dangers  than  is 
possessed  by  many  a  man  who  has  been  employed  for 


xii  ECONOMICS 

years  in  that  great  market. 

The  volumes  treating  of  "Organization  and  Manage- 
ment," "Marketing  Methods  and  Salesmanship,"  "Ad- 
vertising," "Correspondence,  Credits  and  Traffic," 
should  prove  of  great  practical  help  both  to  executives 
who  are  hourly  handling  problems  in  these  fields  and  to 
yoimg  men  who  are  trying  to  get  a  clear  understanding 
of  the  basic  business  processes.  The  volume  on  "Or- 
ganization and  Management"  lays  down  the  funda- 
mental principles  underlying  the  work  of  the  so-called 
efficiency  engineer,  and  describes  methods  which  have 
proved  most  successful  in  the  conduct  of  modern  busi- 
ness. In  the  fields  of  selling,  advertising  and  credits, 
new  business  professions  are  rapidly  being  developed, 
and  the  effort  has  been  made  in  these  volumes  to  give 
the  reader  scientific  and  helpful  guidance.  No  reader 
should  neglect  the  chapters  on  "Business  Correspond- 
ence." 

The  volume  on  "  Commercial  Law,"  primarily  de- 
signed to  keep  business  men  from  making  unnecessary 
blunders,  should  prove  especially  useful  to  employes  of 
banking,  trust,  surety  and  insurance  companies,  and  to 
men  preparing  for  the  accounting  profession. 

Dr.  Galloway,  the  author  of  "Organization  and  Man- 
agement," asks  me  to  make  acknowledgment  of  the  as- 
sistance he  has  received  from  Mr.  Lyford  Rome,  Presi- 
dent of  the  Rome  Construction  Company,  and  from  Mr. 
J.  William  Schulze,  comptroller  of  Robert  H.  Inger- 
soU  and  Brother.  Mr.  Rome  has  contributed  much  of 
the  illustrative  material.  Mr.  Schulze  is  the  author  of 
the  chapter  on  "Office  Methods"  in  Part  II.  Acknowl- 
edgment should  be  made,  also,  of  the  kindness  of  many 
executives  and  industrial  engineers  who  have  been  con- 
sulted on  various  questions. 


EDITOR'S  PREFACE  xiii 

Mr.  Jefferson,  author  of  the  treatise  on  "Banking 
Practice,"  in  the  volume  on  "Banking,"  desires  me  to 
acknowledge  for  him  the  courtesy  of  Mr.  Oscar  New- 
fang,  who  assisted  in  the  preparation  of  the  chapters  on 
"Establishing  Bank  Credit." 

Mr.  De  Bower  and  Mr.  Jones,  joint  authors  of  the 
treatise  on  "Salesmanship"  in  Volume  III,  have  asked 
me  to  acknowledge  their  gratefulness  to  Mr.  Ra5Tnond 
J.  Comyns  and  Dr.  Edwin  C.  Clapp,  who  assisted  gen- 
erously in  the  preparation  of  this  text.  Also  to  Mr. 
John  B.  Swinney,  who  contributed  material  for  the 
chapters  on  "Training  of  Retail  Salesmen." 

Professor  Conway  and  Mr.  Atwood,  the  joint  authors 
of  "Investment  and  Speculation,"  desire  me  also  to  ac- 
knowledge their  indebtedness  to  Mr.  Franklin  Escher, 
formerly  Financial  Editor  of  Harper's  Weekly,  for 
valuable  assistance. 

Mr.  Lough,  author  of  the  volume  on  "Corporation 
Finance,"  wishes  me  to  acknowledge  the  assistance  ren- 
dered by  Mr.  Charles  W.  Gerstenberg  in  the  prepara- 
tion of  this  volume. 

The  editor  in  conclusion  desires  to  say  that  he  has  left 
the  authors  complete  liberty  in  the  expression  of  opin- 
ions and  conclusions.  Each  author  is  alone  responsible 
for  the  views  he  expresses.  In  matters  of  opinion  or 
of  choice  between  opposing  theories  these  volumes  are 
not  in  complete  harmony,  and  no  volumes  of  the  sort 
could  be  unless  they  were  the  product  of  a  single  pen. 

In  order  that  the  reader  may  become  familiar  with 
other  views,  especially  those  of  the  Classical  School, 
the  editor  has  inserted  in  this  volume  citations  from  the 
works  of  other  economists. 

Joseph  Feench  Johnson, 

New  York  University, 


TABLE  OF  CONTENTS 


PART  I:     PRODUCTION. 


CHAPTER  I. 
PROPERTY. 

BECTIOW  PACT 

1.  Economics      Defined 1 

2.  Private    Property 2 

3.  Right    of    Private    Property 4 

4.  Limitation  of  the  Right  of  Private  Property  by  Taxation  6 

5.  Limitation  of  the  Right  of  Private  Property  by  Public 

Improvement 6 

6.  Effects  of  Private  Property  upon  Individuals   ...  7 


CHAPTER    II. 
PRODUCTION. 

7.  Production    and    Producer    Defined    .     ,.,     .:     ..     .      .      13 

8.  Forms   of   Production ,„     .      .      .      14 

9.  Time   Utilities 16 

10.  Possession    Utilities 16 

11.  Agents  of  Production ,      .      •     17 

CHAPTER  IIL 
NATURAL  AGENTS. 

12.  Free  Goods  of  Nature  and  Their  Transformation   .      .  20 

13.  Changes  in  Form  and  Place  Required  by  Production   .  21 

14.  Latent  Powers  of  Nature 22 

15.  Importance  of  Properties  of  Matter  in  Production  .      .  24 

XV 


xvi  ECONOMICS 

CHAPTER  IV. 
LABOR. 

SECTIOW  PAGE 

16.  Labor  Defined 28 

17.  Analysis  of  Labor 28 

18.  Qualities  that  Determine  Efficiency 29 

19.  Physical  Efficiency 29 

20.  Importance  of  Safe  and  Sanitary  Surroundings  .      .      .31 

21.  Views  of  a  Work's  Manager  on  Industrial  Betterment  .  32 

22.  Factory     Legislation 34 

23.  Extra-business   Relations   Between   Employer   and   Em- 

ploye      37 

CHAPTER  V. 
TRAINING  OF  WORKERS. 

24.  Mental   Efficiency   of   Labor 89 

25.  Money  Value  of  Education 41 

26.  Place  of  Mind  in  Production 43 

27.  Importance   of   Training   for   Business 43 

28.  Demand  for  University  Trained  Men  in  Business  .      .  45 

29.  Effect  of  Machine  Industry  upon  Labor 46 

30.  Apprentice  System  of  Baldwin  Locomotive  Works   .      .  47 

31.  Training   Shop   Superintendents 49 

32.  Importance  of  Moral  Efficiency 50 

CHAPTER  VI. 
WOMAN  AND  CHILD  LABOR. 

33.  Labor  of  Women  and  Children 52 

34.  Moral  and  Physical  Effects  of  Child  Labor  .      ...  53 
S5.     Indirect  Effects  of  Child  Labor 54 

36.  Child  Labor  Inefficient  and  Uneconomical    ....  55 

37.  Women  in   Industry 56 

38.  Women's  Wages  Lower  Than  Men's 57 

39.  Women  in  Factory  Industry 58 

40.  The    Problem    of    Woman    in     Industry  —  Arguments 

Against 60 

41.  Arguments  in  Favor  of  Women's  Labor  .....  61 


CONTENTS  xvii 

CHAPTER  VII. 
CAPITAL. 

KECTION  PAGE 

42.  Primitire  Man  Compared  with  Civilized  Man   ...  63 

43.  Capital  Defined 64 

44.  Service  of  Capital  in  Production 65 

45.  Capitalistic    Production    is    Indirect 67 

46.  Illustrations  of  Indirect  Methods  in  Production  —  Fish- 

ing         69 

47.  Illustration    of    Capitalistic    Production  —  Increase    of 

Flour  Trade  to  China 69 

48.  Saving  Defined 71 

49.  Illustration  of  Saving 71 

50.  Necessity    of    Saving 72 

51.  Maintenance    of    Plant    Saving 72 

52.  Illustrations  of  Maintenance 74 

53.  Meaning  of  the  Consumption  of  Capital 76 

54.  Productive  and  Unproductive  Consumption    ....  77 

55.  What  Constitutes  Economic  Usefulness 80 

CHAPTER  VIII. 
DIVISION  OF  LABOR. 

56.  Meaning  of  the  Division  of  Labor 81 

57.  Illustration  of  the  Division  of  Labor  by  the  Operations 

of   a   Woolen    Mill 81 

58.  Advantages  of  Division  of  Labor 84 

59.  Increased  Efficiency  Through  Division  of  Labor  ...  84 

60.  Increased    Specialization 88 

61.  Illustration  from  the  Meat-packing  Industry  .      ...  91 

62.  Economies  Eff'ected  by  Division  of  Labor    ....  92 
6S.     Narrowing  Eff*ect  of  Specialization  and  its   Remedy    .  94 

64.  Division  of  Labor  and  Specialization  of  Plant  ...  95 

65.  Illustrations  of  Economies  of  Specialization  .      ...  95 

66.  To  Show  the  Diff'erence  in  Cost  Where  Diff'erent  Ma- 

chinery and  Diff'erent  Processes  are  Used  .      ...  96 

67.  Illustration    from    the    Manufacture    of    Incandescent 

Burners 98 

68.  Second   Result  —  Continuous   Processes 98 


xviii  ECONOMICS 

CHAPTER  IX. 
LOCATION  OF  INDUSTRIES. 

SECTION  PAGS 

69.  Location    of    Extractive    Industries 100 

70.  The  Influence  of  Climate  Upon  the  Location  of  Indus- 

tries       101 

71.  Perishability  of  Materials  an  Important  Influence  on  Lo- 

cation    102 

72.  Supply  of  Fuel  or  Water  Power  an  Important  Bearing 

on    Location 102 

73.  Industries  Utilizing  Waste  Products 103 

74.  Residence  of  Consumer  Decisive  Factor  in  Location  of 

Some  Industries 103 

75.  Specialization  of  Labor  a  Determining  Factor  of  Some 

Industries .  lO* 

76.  Cheapness  of  Labor  a  Decisive  Influence 104 

77.  Changes  in  the  Location  of  Industry 105 

78.  Pittsburg  as   an   Illustration IO6 

79-     Proximity  to  Supplies  of  Coking  Coal 107 


CHAPTER  X. 
LARGE-SCALE  PRODUCTION. 

80.  Large-scale   Production    Defined 109 

81.  Centralization  of  Production    ........    110 

82.  Economies  of  Large-scale  Production 112 

83.  Other  Advantages  of  Large-scale   Production    .      .      .118 

84.  Essential   Differences   Between   Large  and   Small   Con- 

cerns      114 

85.  Broadening  the  Scope  of  Business  Operations   .      .      .114 

86.  Causes  of  the  Development  of  Large-scale  Production  .    115 


CONTENTS  xix 


PART  II:     EXCHANGE. 

CHAPTER  I. 
MEDIA  OF  EXCHANGE. 

(ECTIOir  PAG> 

87.  Necessity    for    Exchange 120 

88.  Two  Forms  of  Exchange 121 

89.  Medium  of  Exchange 122 

90.  Commodities  Used  as  Media  of  Exchange    .      .      .      .123 

91.  Characteristics  of  a  Medium  of  Exchange    .      .      .      .123 


CHAPTER  II. 
MONEY  SYSTEM  OF  THE  UNITED  STATES. 

92.     Unit  of  Value 125 

98.     Kinds  of  American  Money 125 

94.  Parity  of  Paper  Money  and  Coin 126 

95.  Government    Guarantees 127 

96.  Bimetallism 128 

97.  Abandonment  of  the  Double  Standard 129 

98.  Inconvertible    Paper 130 

99.  Paper  Money  Issues  During  the  Civil  War  .      .      .      .132 


CHAPTER  III. 
CREDIT. 

100.  Credit  Defined 133 

101.  Functions  of  a  Bank 134 

102.  Checks  as  a  Medium  of  Exchange 135 

103.  Clearing     House 137 

104.  Deposit  Currency  is  a  Check  Currency 139 

105.  Limitations   of   Bank   Credit 140 

106.  Extent  to  Which  "  Promises  to  Pay"  are  Used  .      .      .140 

107.  Basis  of  Bank  Credit 141 


XX  ECONOMICS 

CHAPTER  IV. 
BANKING   SYSTEMS. 

SECTION  PAGE 

108.  Organization  of  National  Banks  in  the  United  States   .  142 

109.  Powers  of  National  Banks 142 

IIG.     National   Bank    Reserves 144 

111.  Bank  of  England 145 

112.  Bank    of    France 145 

113.  Imperial   Bank  of   Germany 146 

114.  Protection  of  Bank  Note  Issues 146 

115.  Asset  Currency 147 


CHAPTER  V. 
PRICES. 

116.  How  Value  is  Determined 149 

117.  Value  of  Commodities  Expressed  Only  in  Money   .      .152 

118.  Prices  and  Profits .      .154 

119.  Making  of  Prices 159 

120.  Factors   Which    Influence    Price 160 

121.  Factors  Influencing  Demand l62 

122.  Method  of  Operation  of  These  Factors 163 

123.  Utility  to  Consumer  a  Factor  in  Determining  Price  .      .165 

124.  Price  Fluctuations  and  Their  Cause l67 


CHAPTER  VI. 
INTERNATIONAL  EXCHANGE. 

125.  International    Payments 169 

126.  Domestic     Exchange 170 

127.  Similar    Method    Employed    in    the    International    Ex- 

changes       171 

128.  Essential  Elements  of  the  Transaction 173 

129-     International  Exchange  an  Off'setting  of  Credits  .      .      .173 

130.  Other  Sources  of  Bills  of  Exchange 174 

131.  Large  Surplus  of  Commodities  Must  be  Exported   .      .175 
182.     International  Income  Account 176 


CONTENTS  xxi 


PART  III:    DISTRIBUTION. 

CHAPTER  I. 
FORMS  OF  OWNERSHIP. 

SRCriON  PAOB 

138.     Four  Interests  in  Every  Business 182 

134.  Entrepreneur 182 

135.  Three  Forms  of  Entrepreneur 183 

136.  Partnership 183 

137.  Kinds  of  Partners 184 

138.  Obligations    of    Partners 185 

139.  Direction  and  Dissolution  of  Partnerships    .      .      .      .186 

140.  Corporation 187 

141.  Advantages    of   the    Corporation 187 

142.  Limited    Liability 188 

143.  Industrial  Income  —  Distribution  of 189 

144.  Claimants   to    Income 191 

CHAPTER  IL 
CLASSES  OF  WORKERS. 

145.  Organizer 193 

146.  Knowledge  Possessed  by  the  Organizer 194 

147.  Industrial  Importance  of  the  Organizer 194 

148.  How  the  Supply  of  Organizers  Can  be  Increased   .       .  195 

149.  Manager I96 

1-60.     Training  of  Managers 198 

151.  Boss 199 

152.  Classes  of  Labor  in  Relation  to  Wages 200 

153.  Unskilled     Labor 201 

CHAPTER   III. 
CAUSES  AFFECTING  RATE  OF  WAGES. 

154.  Real   and   Money   Wages 203 

155.  Illustration    of    Distinction    Between    Real   and    Money 

Wages 208 


xxii  ECONOMICS 


PACK 


156.  Distinction   Between   Fees    and   Wages    .....   204 

157.  How  Rates  of  Wages  are   Determined 205 

158.  Demand  for  Labor 206 

159-  Other  Causes  AiFecting  the  Demand  for  Labor  .      .      .   207 

160.  The  Supply  of  Labor 208 

161.  Immigration 208 

162.  Conditions  of  Employment  as  Affecting  the  Supply  of 

Labor 209 

163.  Supply  of  Labor  in  Each  Class 210 

164.  Qualifications  for  Various  Positions 211 

165.  Railway  Traffic  Manager 212 

166.  Railway  President 212 

CHAPTER  IV. 
SYSTEMS  OF  PAYMENT. 

167.  Payment  of  Wages  According  to  Efficiency  .      .      .      .215 

168.  Loss  of  Time  Through  Idleness 217 

169.  Systems  of  Wage  Payment  Calculated  to  Increase  Effi- 

ciency    218 

170.  Profit-sharing  Unfair  to   Employer 219 

171.  Piece  Wages 220 

172.  Objections  to  Piece  Work 221 

173.  Premium  System  of  Wage  Payment 222 

174.  Summary  of  the  Advantages  of  the  Premium  System    .  223 

175.  Advantages  to  Employes  From  Introduction  of  Improved 

Machinery 224 

176.  Hazards   of   Different   Occupations 226 

177-     Illustration  from  Manufacture  of  Bleaching  Powder    .  227 
178.     Supply  of  Labor  Depends  on  Chances  of  Success   ,      .  229 
179-     Sole  or   Partial   Dependence  of  Labor   on   Wages   Re- 
ceived    230 

CHAPTER  V. 
LABOR  ORGANIZATIONS. 

1 80.  The  Trade  Union  and  the  Supply  of  Labor  ....   232 

181.  Form  of  Organization  of  Union 283 


CONTENTS  xxiii 

SECTION  PAGE 

182.  The  United  Mine  Workers  of  America 284 

183.  The  National  Convention 235 

184.  Objects  of  the  Trade  Union 2S6 

185.  The  Trade  Agreement 236 

186.  Contests  Between  Employer  and  Employe    ....  239 

187.  The   Strike 240 

188.  Picketing    in    Strikes 241 

189.  Ostracism 242 

190.  Illustrations  of  Ostracism 242 

191.  The  Strike  an  Effective  Weapon .  244 

192.  Situation  of  the  Employer  Under  Competition   .      .      .  244 

193.  Strong  Position  of  the  Union  in  Negotiating  with  Com- 

petitors       245 

194.  Common  Action  Among  Employers  is  Impossible  Under 

Competition 247 

195.  Collective  Bargaining  Better  Than  the  Strike   .      .      .  248 

196.  Other  Activities  of  Trades  Unions 249 

197.  Employer's  Attitude  Toward  the  Closed  Shop   .      .      .249 

198.  Unreasonable  Demands  of  Trades   Unions    ....  250 

199.  Opposition  to  Labor-saving  Machinery 251 

200.  Most  Promising  Field  for  Trade  Union  Development  .  252 


CHAPTER  VI. 
RENT. 

201.  Rent    Defined 254 

202.  Forms  of  Rent  Payments 255 

203.  How  the  Amount  of  Rent  is  Determined 256 

204.  Agricultural      Rents 257 

205.  Influence  of  Price  on  Rent 260 

206.  Location  in  Relation  to  Rent 26 1 

207.  Rent  of  Mines 261 

208.  Ground    Rents 262 

209.  Location  of  Retail  Stores 263 

210.  Other  Factors  Determining  the  Value  of  Locations  .      .  264 

211.  Building    Rentals 265 

212.  Economic  Rent 266 


xxiv  ECONOMICS 

CHAPTER  VII 
INTEREST. 

SECTION  PAGB 

213.  Interest  Universal 269 

214.  Why  Interest  is  Paid 269 

215.  Interest  Paid  for  Money 270 

216.  Interest  and  Discount  Identical 271 

217.  Forms  of  Security  for  Loans 271 

218.  The   Mortgage 272 

219.  Collateral  Security 273 

220.  Classes  of  Loans 274 

221.  Short   Time   Commercial   Loans 274 

222.  Long  Time  Loans 275 

223.  Public    Bonds     .      .      .  ' 277 

224.  The    Investor 277 

225.  Rates  of  Interest  on  Loans 278 

226.  Causes  Determining  the   Rate  of  Interest    .      .      .      .279 

227.  Basis  of  Classification  of  Loans 282 

228.  Changes  in  Interest  Rates 283 

229.  Limitations  to  the  Expansion  of  Bank  Credit   .      .      .  285 


CHAPTER  VIIL 
PROFITS. 

230.  How   Profits   are   Calculated 286 

231.  The   Farmer's   Profits 286 

232.  Manufacturing    and    Railroad    Profits     .      .      .      .      .  288 

233.  Profits  Difficult  to  Make 288 

234.  Effect  of  High  Prices 289 

235.  How  Profits  are  Made 290 

236.  Appreciation  of  Property 291 

237.  Superior  Ability  as  a  Source  of  Profits 291 

238.  Advantages  of  the  Carnegie  Steel  Company  ....  292 

239.  Superior  Equipment  in  Machinery  and  Men  ....  293 

240.  Extraordinary  Demand  for  the  Product  in  Source  of 

Profit 295 

241.  Speculation  as  a  Source  of  Profits 296 


CONTENTS  XXV 

SBCTION  TAOm 

242.  Monopoly  as  a  Source  of  Profits 298 

243.  Monopoly   of   Large    Industries 299 

244.  Franchises    and    Patents 300 

245.  Monopoly  of  Quality 301 

CHAPTER  IX. 
TAXATION. 

246.  Functions  of  Government  ..........  SOS 

247.  Taxes   Defined 304 

248.  Basis  of  Taxation 305 

249.  Maxims   of    Taxation 305 

250.  Forms  of  Taxation 306 

251.  Advantages  of  Direct  Taxation 306 

252.  Advantages  of  Indirect  Taxation 307 

253.  General  Property  Tax 307 

254.  Income  Tax 309 

255.  Single  Tax  on  Land  Values 310 

256.  Proposition  of  the  Single  Tax 311 

257.  Fiscal  Objections  to  the  Single  Tax 312 

258.  Economic  Objections  to  the  Single  Tax 313 

259.  Inheritance     Tax 314 

260.  Excise    Duties 317 

261.  Customs 317 

262.  Ideal   Systems   of    Taxation    .      .      .     .....      .      .      .318 


PART  IV:    ECONOMIC  PROBLEMS 

CHAPTER  L 
RAILROAD  PROBLEM. 

263.  Transportation  a  Factor  in  our  National  Economic  Life  320 

264.  Development  of  the  Railroad  System 320 

265.  Railroad   a   Form   of   Monopoly 321 

266.  The  Railroad  is  Quasi-public  in  Nature 322 

267.  Problem  of  Discrimination 328 


xxvi  ECONOMICS 

SECTION  rAa% 

268.  History  of  Railroad  Legislation 325 

269-  Interstate  Commerce  Act  of  1887 326 

270.  Elkins   Law   of    1903 327 

271.  Hepburn  Act  of  1906 328 

272.  Public  Regulation  Versus  Public  Ownership  .      .      .      .328 


CHAPTER  II. 
TARIFF  PROBLEM. 

273.  Basis  of  International  Trade 332 

274.  Protective    Tariff 334 

275.  Operation  of  a  Protective  Tariff 334 

276.  Theory  of  Protection 335 

277.  Evils  of  "  Dumping  " 338 

278.  "  Dumping "  a  Present  Problem 339 

279.  Why  "  Dumping  "  is  Possible 340 

280.  Production  on  a  Large  Scale  Economical 341 

281.  United  States  Steel  Corporation  and  "  Dumping  "   .      .  342 

282.  Tariff   wall   prevents    "  Dumping " 343 

283.  Foreign  Importations  not  Always  an  Evil    ....  344 

284.  Need  for   Reciprocity 346 

285.  WhatKindof  a  Tariff  System  Shall  we  Adopt?  .      .      .347 


CHAPTER  in. 
TRUST  PROBLEM. 

286.  Beginning  of  the   Trust  Movement 349 

287.  Rapid    Growth    in    1898 350 

288.  Relation  of  Prosperity  to  the  Trust  Movement  .      .      .  ^52 

289.  Promoter   and   Trust   Movement 353 

290.  Evolution   of   the    Trust 356 

291.  Weakness  of  the  Pool 356 

292.  Original    Organization    of    the    Trust 357 

293.  Trusts    Declared    Illegal 359 

294.  Holding  Company 360 

259.     Success  of  the  Holding  Company 36l 


CONTENTS  xxvii 

SECTION  TAGS 

296.  Corporation    Law    of    New    Jersey S62 

297.  Legality  of  the  Holding  Company S6S 

298.  Economics  of  Combination 365 

299.  Unfair  Advantage  of  the  Trusts 366 

300.  Discriminating  Prices 867 

301.  Unfair  Contracts  With  Retailers 369 

302.  Further  Causes  of  Popular  Hostility  Toward  the  Trusts  370 

303.  Stock     Manipulation 372 

304.  History  of  the  Trust  Legislation 374 

305.  Sherman  Anti-Trust  Act 374 

306.  Failure  of  the  Sherman  Act 375 

307.  Bureau    of    Corporations 377 

308.  Future  of  the  Trust  Problem 377 


CHAPTER  IV. 
PROBLEM  OF  MONOPOLY. 

309.  Nature  of  Monopoly 379 

310.  Monopoly  a  Universal  Phenomenon 880 

311.  Monopoly  Accompanies  Progress 881 

312.  One  Monopoly  Feeds  on  Another 388 

313.  Some  Would  Apportion  the  Social  Surplus  by  Law  .      .384 

314.  Objections  to  Government  Regulation  of  Prices  .      .      .385 

315.  Interest  of  Consumers  in  Prices 385 

316.  The  Consumer  May  Also  be  a  Stockholder   .      .      ,      .387 

317.  The  Problem  is  to  Universalize  Monopoly  Power   .      .   388 

318.  Power  of  Substitution 389 

319.  Power  of  Substitution  and  the  Price  of  Oil  .      .      .      .   390 

320.  Social  Welfare  May  Occasionally   Compel  Government 

Regulation    of    Prices 392 


CHAPTER  V 
•SOCIALISM. 

321.  Social    Unrest 895 

322.  Exploitation 896 

823.     No  Remedy  Furnished  by  Individualism 897 


xxviii  ECONOMICS 


PAGE 


324.  Wastefulness    of    Individualism 397 

325.  Competition  Essentially  Evil 398 

326.  Socialistic     Program 398 

327.  Socialism  and  the  Single  Tax 400 

328.  How  is  Socialism  to  be  Instituted 400 

329-  Reconciliation   Between   Socialism   and   Individualism    .  403 

330.  Socialists  Making  Concessions  to  Individualism  .      .      .  405 

331.  H.  G.  Wells  on  Socialism  as  Social  Democracy  .      .      .  406 


CHAPTER  VI 
LABOR  PROBLEM. 

332.  Nature   of   the    Problem 413 

333.  Aims  of  the  Union 414 

334.  Wage-worker  as  a  Bargainer 417 

335.  Closed     Shop 417 

336.  Boycott 418 

337.  Opposition  to  Machinery 419 

338.  Efforts  to  Restrict  Trade  Unions 420 

339.  Methods  of  Conciliation  and  Arbitration 423 


PART  I:    PRODUCTION 

CHAPTER  I 

PROPERTY 

Iw  Economics  defined. — Economics,  the  science  of 
business,  treats  of  man's  activity  in  the  acquisition  of 
wealth.  This  science  explains  how  wealth  is  created 
and  made  available  for  the  satisfaction  of  human  wants, 
and  how  the  ownership  of  wealth  produced  is  appor- 
tioned among  the  various  agents  who  have  contributed 
to  its  production. 

Wealth  may  be  defined  as  consisting  of  everything 
which  serves  any  human  purpose  and  which  nature  does 
not  supply  gratuitously  to  man.  Everything  is,  there- 
fore, included  in  the  definition  of  wealth,  to  obtain  which 
something  will  be  given  in  exchange.  This  definition 
of  wealth  excludes  some  of  the  most  desirable  and  nec- 
essary goods.  Air  and  sunshine  are  indispensable  to 
human  existence.  If  they  could  not  be  obtained  free, 
large  sums  would  be  given  to  obtain  them.  Since  these 
goods  are,  however,  commonly  to  be  produced  in  un- 
limited quantities,  as  free  gifts  of  nature,  they  are  not 
counted  as  elements  of  wealth.  They  are  known  as 
free  goods. 

In  contrast  with  free  goods  are  economic   goods, 

which  are  those  goods  which  have  a  value  because  their 

supply  is  limited.      Wealth  is  the   sum  total  of  all 

economic  goods.     This  division  of  all  goods  into  two 

classes  does  not  imply  a  hard  and  fast  distinction  be- 
l-i  1 


2  ECONOMICS 

tween  them.  Free  goods  pass  into  the  class  of  economic 
goods  the  moment  the  demand  for  them  exceeds  the 
supply.  Thus  we  consider  water  as  a  free  good,  but 
in  our  large  cities  a  rental  must  be  paid  to  obtain  it, 
and  there  is  also  a  large  trade  in  spring  and  distilled 
water,  which  is  bottled  and  sold  at  a  high  price.  In  the 
same  way  air  and  sunshine  may  become  economic  goods. 
The  climate  of  the  Jersey  coast,  for  example,  has  a 
distinct  economic  value,  and  because  of  this  climate  enor- 
mous prices  are  paid  for  land  contiguous  to  the  shore. 

,We  may  also  distinguish  between  individual  wealth 
consisting  of  goods  exclusively  possessed  by  individuals, 
and  national  wealth,  which  is  the  common  property  of 
the  entire  nation  and  cannot  be  appropriated  by  in- 
dividuals. The  surface  of  Manhattan  Island  is  worth 
several  billion  dollars  to  those  who  own  it.  The  wealth 
of  the  United  States,  however,  is  not  increased  because  of 
this  fact.  On  the  other  hand,  in  our  great  systems  of 
rivers  the  United  States  has  a  resource  of  incalculable 
value,  no  part  of  which,  for  the  near  future  at  least,  is 
likely  to  be  appropriated  by  individuals.  The  subject 
matter  of  economics,  therefore,  to  summarize  our  defi- 
nition, consists  of  all  those  useful  and  desirable  things 
which  are  so  limited  in  quantity  that  they  can  be  appro- 
priated by  individuals,  or,  another  statement  of  the  same 
thought,  wealth  consists  of  all  useful  and  agreeable 
things  except  those  which  are  freely  supplied  by  nature. 
2.  Private  property. — Our  next  question  concerns  the 
institution  of  private  property.  The  right  of  property 
is  defined  by  Blackstone  as  "that  sole  and  despotic  do- 
minion which  one  man  claims  and  exercises  over  the 
external  things  of  the  world,  in  total  exclusion  of  the 
right  of  any  other  individual  in  the  universe."  ^     The 

I  Cooley's  Blackstone,  3d  Ed.,  Vol.  I,  Book  II,  p.  1. 


PROPERTY  6 

origin  of  private  property  is  explained  by  the  same 
writer  as  arising  out  of  the  necessities  of  the  various 
situations  in  which  man  found  himself.  Originally  the 
right  of  possession  continued  only  for  the  time  during 
which  the  active  possession  lasted.  The  ground,  for 
example,  was  originally  everywhere  held  in  com- 
mon, no  part  of  it  being  the  property  of  any  one  in  par- 
ticular, "yet  whoever  was  in  the  occupation  of  any  deter- 
mined spot  of  it,  for  rest,  for  shade,  or  the  like,  acquired 
for  the  time  a  sort  of  ownership,  from  which  it  would 
have  been  unjust,  and  contrary  to  the  law  of  nature, 
to  have  driven  him  by  force;  but  the  instant  that  he 
quitted  the  use  or  occupation  of  it,  another  might  seize 
it,  without  injustice."  ^ 

This  community  of  ownership,  however,  was  only 
transitory.     To  continue  Blackstone's  explanation: 

But  when  mankind  increased  in  number,  craft,  and  ambition, 
it  became  necessary  to  entertain  conceptions  of  more  permanent 
dominion ;  and  to  appropriate  to  individuals  not  the  immediate 
use  only,  but  the  very  substance  of  the  thing  to  be  used.  Other- 
wise innumerable  tumults  must  have  arisen,  and  the  good  order  of 
the  world  been  continually  broken  and  disturbed,  while  a  variety 
of  persons  were  striving  who  should  get  the  first  occupation  of 
the  same  thing,  or  disputing  which  of  them  had  actually  gained 
it.  As  human  life  also  grew  more  and  more  refined,  abundance 
of  conveniences  were  devised  to  render  it  more  easy,  commodious, 
and  agreeable;  as,  habitations  for  shelter  and  safety,  and  rai- 
ment for  warmth  and  decency.  But  no  man  would  be  at  the 
trouble  to  provide  either,  so  long  as  he  had  only  a  usufructuary 
property  in  them,  which  was  to  cease  the  instant  that  he  quitted 
possession ;  if,  as  soon  as  he  walked  out  of  his  tent,  or  pulled  off 
his  garment,  the  next  stranger  who  came  by  would  have  a  right 
to  inhabit  the  one,  and  to  wear  the  other.     In  the  case  of  habi' 

1  Cooky's  Blackstone,  Vol.  I,  Book  II,  p.  S. 


4  ECONOMICS 

tations  in  particular,  it  was  natural  to  observe,  that  even  the 
brute  creation,  to  whom  everything  else  was  in  common,  main- 
tained a  kind  of  permanent  property  in  their  dwellings,  espe- 
cially for  the  protection  of  their  young;  that  the  birds  of  the 
air  had  nests,  and  the  beasts  of  the  field  had  caverns,  the  in- 
vasion of  which  they  esteemed  a  very  flagrant  injustice,  and 
would  sacrifice  their  lives  to  preserve  them.^ 

According  to  Blackstone  the  idea  of  property  in  land, 
the  exclusive  dominion  over  the  surface  of  the  earth, 
was  the  last  to  be  evolved. 

As  the  world  by  degrees  grew  more  populous,  it  daily  became 
more  difficult  to  find  out  new  spots  to  inhabit,  without  encroach- 
ing upon  former  occupants ;  and  by  constantly  occupying  the 
same  individual  spot,  the  fruits  of  the  earth  were  consumed, 
and  its  spontaneous  produce  destroyed,  without  any  provision 
for  a  future  supply  of  succession.  It  therefore  became  neces- 
sary to  pursue  some  regular  method  of  providing  a  constant 
subsistence ;  and  this  necessity  produced,  or  at  least  promoted 
and  encouraged,  the  art  of  agriculture.  And  the  art  of  agri- 
culture, by  a  regular  connection  and  consequence,  introduced  and 
established  the  idea  of  a  more  permanent  property  in  the  soil 
than  had  hitherto  been  received  and  adopted.  It  was  clear  that 
the  earth  would  not  produce  her  fruits  in  suflScient  quantities, 
without  the  assistance  of  tillage ;  but  who  would  be  at  the  pains 
of  tilling  it,  if  another  might  watch  an  opportunity  to  seize 
upon  and  enjoy  the  product  of  his  industry,  art  and  labor? 
Had  not  therefore  a  separate  property  in  lands,  as  well  as  mov- 
ables, been  vested  in  some  individuals,  the  world  must  have  con- 
tinued a  forest,  and  men  have  been  mere  animals  of  prey ;  which, 
according  to  some  philosophers,  is  the  genuine  state  of  nature.^ 

3.  The  right  of  private  property. — The  right  of  pri- 
vate property  carries  with  it  the  following  express 
provisions:     first,  the  right  to  use;  second,  the  right 

1  Cooley's  Blackstone,  Vol.  I,  Book  II,  p.  2. 

2  Cooley's  Blackstone,  Vol.  I,  Book  II,  p.  6. 


PROPERTY  5 

to  dispose  of  by  gift  or  by  sale;  third,  the  right  to  de- 
vise or  bequeath.  The  owner  of  a  farm,  for  example, 
has  the  right,  in  which  he  is  protected  by  the  state,  to  sell 
it  or  to  exchange  it  for  something  else,  and  finally,  to 
hand  down  this  possession  to  his  heirs.  He  has,  in  a 
word,  the  "free  use,  enjoyment  and  disposal  of  all  his 
acquisitions  without  any  control  or  diminution  save  only 
by  the  laws  of  the  land." 

In  every  stage  of  society  these  rights  have  been  sub- 
ject to  certain  limitations  and  restrictions  whose  ob- 
ject and  effect  has  been  to  render  property  more  secure. 
These  restrictions  on  the  exclusive  dominance  over  ma- 
terial things  by  individuals  cannot  exist  except  in  cases 
of  well-ordered  society  where  established  laws  are  en- 
forced by  organized  government.  From  the  institution 
of  property  maintained  by  organized  society  which  we 
call  the  state,  two  conclusions  follow:  First,  that  no 
man  should  use  his  property  in  a  way  opposed  to  the 
good  of  the  community  in  which  he  Hves  and  which 
protects  him  in  his  possession  of  this  property;  and  sec- 
ond, that  the  state  should  have  the  right  to  take  from 
him  such  portion  of  his  property  as  may  be  necessary  to 
preserve  its  existence  and  to  achieve  its  ends. 

Custom  and  a  sense  of  propriety  demand  of  the  in- 
dividual that  he  subordinate  the  exercise  of  the  rights 
of  private  property  to  social  interests  and  social  require- 
ments. The  owner  of  the  property  must,  therefore, 
use  it  in  such  a  way  as  not  to  injure  or  inconvenience 
his  fellows.  Thus  he  cannot  keep  a  vicious  dog  un- 
chained; he  cannot,  in  a  town,  keep  gasoline  for  sale 
or  use  without  proper  precautions  against  explosions. 
The  proprietors  of  manufacturing  plants,  the  fumes 
from  which  are  offensive,  are  frequently  required,  when 
they  are  located  in  a  large  city,  to  build  chimneys  to 


6  ECONOMICS 

an  enormous  height  in  order  that  the  fumes  may  be 
dissipated  before  descending  to  the  level  of  the  ground, 
or  in  cases  where  the  waste  products  of  factories  when 
discharged  into  the  streams  pollute  the  source  of  water 
supply,  the  owners  of  these  plants  may  be  forced  to 
provide,  often  at  great  expense,  for  some  other  means 
of  disposal. 

4.  Limitation  of  the  right  of  private  property  by 
taooation. — The  universal  limitation  of  the  right  of 
private  property  is  the  right  of  taxation.  Every  prop- 
erty owner  is  required  to  contribute  from  his  means  to 
the  support  of  the  state,  and  the  only  limitation  to  the 
contribution  which  may  be  exacted  from  each,  aside  from 
the  necessity  of  obtaining  the  consent  of  the  majority 
and  the  business  inexpediency  of  over-burdening  incomes 
and  industry,  is  found  in  the  necessities  of  the  state. 

5.  Limitation  of  the  right  of  private  property  by 
public  improvement. — No  man  can  maintain  his  right  to 
private  property  which  is  wanted  for  a  work  of  public 
improvement.  If  a  railroad  is  to  be  put  through  a 
man's  farm,  and  he  refuses  to  part  with  his  property  at 
a  reasonable  price,  the  railroad  company  may  invoke  the 
right  of  "eminent  domain,"  and  the  courts,  acting  as 
the  agents  of  the  state,  will  place  a  fair  value  on  the 
property  which  the  railroad  desires,  and  will  compel  the 
owner  to  accept  this  amount  of  money  for  his  property. 
In  many  other  ways  the  right  of  private  property  is 
limited  by  the  necessities  of  social  existence. 

Since  private  property  would  be  impossible,  however, 
without  the  constraint  and  support  of  organized  society 
which  protects  its  possessors  in  their  ownership,  these 
limitations  are  not  to  be  considered  as  impairing  the 
right  of  private  ownership.  It  is  generally  agreed  that 
the  institution  of  private  property  conduces  more  to  the 


PROPERTY  7 

general  welfare  of  the  community  than  any  other  which 
can  be  substituted  for  it. 

6.  Effects  of  private  property  upon  individuals. — 
Men  will  not  exert  themselves  to  produce  more  wealth 
than  is  needed  for  their  immediate  subsistence  unless  they 
are  to  be  secured  in  the  enjoyment  of  what  they  produce. 
In  countries  such  as  Morocco  or  Turkey,  where  the  right 
of  property  is  disregarded  by  the  government,  and  where 
accumulations  of  wealth  are  likely  to  be  seized  at  any 
time  by  soldiers  or  officials,  it  is  well  known  that  only  a 
small  amount  of  wealth  exists  and  that  the  people  are 
miserably  poor.  In  other  countries,  however,  where 
property  rights  are  secure,  wealth  is  abundant  and 
poverty  is  rare.  Generally  speaking,  the  prosperity  of 
a  people  increases  in  proportion  as  individuals  are  se- 
cured in  the  possession  and  enjoyment  of  what  they  pro- 
duce or  acquire.  It  was  said  by  an  eighteenth  century 
writer,  "Give  a  man  the  secure  possession  of  a  barren 
rock  and  he  will  turn  it  into  a  garden." 

This  principle  is  well  illustrated  in  a  description  of 
conditions  of  society  in  one  of  the  remote  valleys  of  the 
high  Alps,  written  by  Mr.  H.  D.  Inglis  many  years  ago : 

In  the  whole  of  the  Engadine  the  land  belongs  to  the  peasan- 
try, who,  like  the  inhabitants  of  every  other  place  where  this 
state  of  things  exist,  vary  greatly  in  the  extent  of  their  pos- 
sessions. .  .  ,  Generally  speaking,  an  Engadine  peasant 
lives  entirely  upon  the  produce  of  his  land,  with  the  exception  of 
the  few  articles  of  foreign  growth  required  in  his  family,  such 
as  coffee,  sugar  and  wine.  Flax  is  grown,  prepared,  spun,  and 
woven  without  ever  leaving  his  house.  He  has  also  his  own 
wool,  which  is  converted  into  a  blue  coat  without  passing  through 
the  hands  of  either  the  dyer  or  the  tailor.  The  country  is  in- 
capable of  greater  cultivation  than  it  has  received.  All  has  been 
done  for  it  that  industry  and  an  extreme  love  of  gain  can  de- 


8  ECONOMICS 

vise.  There  is  not  a  foot  of  waste  land  in  the  Engadine. 
.  .  .  Wherever  grass  will  grow,  there  it  is ;  wherever  a  rock 
will  bear  a  blade,  verdure  is  seen  upon  it;  wherever  an  ear  of 
rye  will  ripen,  there  it  is  to  be  found.  Barley  and  oats  also 
have  their  appropriate  spots ;  and  wherever  it  is  appropriate  to 
ripen  a  little  patch  of  wheat,  the  cultivation  of  it  is  attempted. 
In  no  country  in  Europe  will  be  found  so  few  poor  as  in  the 
Engadine.  In  the  village  of  Suss,  which  contains  about  six 
hundred  inhabitants,  there  is  not  a  single  individual  who  has  not 
wherewithal  to  live  comfortably,  not  a  single  individual  who  is 
indebted  to  others  for  one  morsel  that  he  eats.^ 

The  same  evidence  is  furnished  by  observers  of  the 
effect  of  immigration  upon  the  thrift  and  acquisitiveness 
of  the  natives  of  Southern  Italy.  These  southern 
Italians  and  Sicilians  are  at  home  miserably  poor.  The 
taxes  on  property  are  so  high  as  to  amount  to  practical 
confiscation.  When  working  for  others  the  farmer  re- 
ceives only  twenty  to  thirty  cents  a  day,  and  the  cost  of 
living  per  individual  does  not  exceed  five  cents  per  day. 
These  poverty-stricken  people  have  come  to  America  in 
great  numbers  and  some  of  them  have  settled  in  the 
country,  where  their  accumulations  of  property  have 
been  extraordinary.  In  the  town  of  Hammonton,  New 
Jersey,  for  example,  there  were  323  Itahans  in  1904, 
most  of  whom  landed  with  practically  no  money  only 
a  few  years  before,  who  owned  4,846  acres  assessed  at 
$176,575  and  worth  double  that  amount.  Of  the  1,370 
names  on  the  tax  register,  448,  or  one-third,  were  Ital- 
ians, of  whom  but  96  paid  only  a  poll  tax.  One  Itahan 
owned  six  houses  and  fourteen  acres  of  land  valued  at 
$10,000;  another  had  a  farm  and  business  with  an  es- 
timated value  of  $15,000.     The  People's  Bank  of  Ham- 

1 "  Switzerland,  the  South  of  France  and  the  Pyrenees  in  1830,"  H.  D. 
Inglis,  Vol.  I,  Chapters  8  and  10. 


PROPERTY  9 

monton  in  September,  1890,  had  450  deposit  accounts 
on  its  books  amounting  to  $87,080;  only  three  of  these 
accounts  belonged  to  Italians  and  their  aggregate 
amount  was  less  than  $500.  In  1904<,  however,  out  of 
$260,779  on  deposit,  $56,614  or  21.7  per  cent  belonged 
to  Italians.  No  better  illustration  of  the  stimulating 
effect  of  the  exclusive  use  of  the  product  of  one's  labor 
in  stimulating  industry  and  encouraging  acquisition 
could  be  desired  than  the  experience  of  these  Sicihans 
whom  General  Francis  A.  Walker  described  as  "beaten 
men  from  beaten  races,  the  worst  failures  in  the  struggle 
for  existence." 

We  may  conclude,  therefore,  that  the  right  of  prop- 
erty is  justified  by  its  results  in  the  prosperity  of  the 
individual  and  the  state.  The  burden  of  proof  rests 
upon  those  who  would  substitute  for  private  property 
some  system  of  common  ownership,  such  as  Communism 
or  Socialism,  to  show  that  these  revivals  of  institutions 
which  preceded  private  property  would  conduce  more  to 
the  general  welfare  than  the  system  which  now  prevails, 
and  which  has  in  its  favor  the  accumulated  experience  of 
every  civilized  nation. 

Private  property,  as  an  institution,  did  not  owe  its  origin  to 
any  of  those  considerations  of  utility  which  plead  for  the  main- 
tenance of  it  when  established.  Enough  is  known  of  rude  ages, 
both  from  history  and  from  analogous  states  of  society  in  our 
own  time,  to  show  that  tribunals  (which  always  precede  laws) 
were  originally  established,  not  to  determine  rights,  but  to 
repress  violence  and  terminate  quarrels.  With  this  object  chiefly 
in  view,  they  naturally  enough  gave  legal  eff'ect  to  first  occu- 
pancy, by  treating  as  the  aggressor  the  person  who  first  com- 
menced violence,  by  turning,  or  attempting  to  turn,  another  out 
of  possession.  The  preservation  of  the  peace,  which  was  the 
original  object  of  civil  government,  was  thus  attained;  while 


10  ECONOMICS 

by  confirming,  to  those  who  already  possessed  it,  even  what  was 
not  the  fruit  of  personal  exertion,  a  guarantee  was  incidentally 
given  to  them  and  others  that  they  would  be  protected  in  what 
was  so. 

In  considering  the  institution  of  property  as  a  question  in 
social  philosophy,  we  must  leave  out  of  consideration  its  actual 
origin  in  any  of  the  existing  nations  of  Europe.  We  may  sup- 
pose a  community  unhampered  by  any  previous  possession;  a 
body  of  colonists,  occupying  for  the  first  time  an  uninhabited 
country ;  bringing  nothing  with  them  but  what  belonged  to  them 
in  common,  and  having  a  clear  field  for  the  adoption  of  the  insti- 
tutions and  polity  which  they  judged  most  expedient;  required, 
therefore,  to  choose  whether  they  would  conduct  the  work  of 
production  on  the  principle  of  individual  property,  or  on  some 
system  of  common  ownership  and  collective  agency. 

If  private  property  were  adopted,  we  must  presume  that  it 
would  be  accompanied  by  none  of  the  initial  inequalities  and 
injustices  which  obstruct  the  beneficial  operation  of  the  principle 
in  old  societies.  Every  full-grawn  man  or  woman,  we  must  sup- 
pose, would  be  secured  in  the  unfettered  use  and  disposal  of  his 
or  her  bodily  and  mental  faculties ;  and  the  instruments  of  pro- 
duction, the  land  and  tools,  would  be  divided  fairly  among  them, 
so  that  all  might  start,  in  respect  to  outward  appliances,  on 
equal  terms.  It  is  possible  also  to  conceive  that  in  this  original 
apportionment,  compensation  might  be  made  for  the  injuries  of 
nature,  and  the  balance  redressed  by  assigning  to  the  less  robust 
members  of  the  community  advantages  in  the  distribution,  suf- 
ficient to  put  them  on  a  par  with  the  rest.  But  the  division,  once 
made,  would  not  again  be  interfered  with ;  individuals  would  be 
left  to  their  own  exertions  and  to  the  ordinary  chances,  for 
making  an  advantageous  use  of  what  was  assigned  to  them.  If 
individual  property,  on  the  contrary,  were  excluded,  the  plan 
which  must  be  adopted  would  be  to  hold  the  land  and  all  instru- 
ments of  production  as  the  joint  property  of  the  community, 
and  to  carry  on  the  operations  of  industry  on  the  common  ac- 
count. The  direction  of  the  labor  of  the  community  would 
devolve  upon  a  magistrate  or  magistrates,  whom  we  may  sup- 


PROPERTY  11 

pose  elected  by  the  suffrages  of  the  community,  and  whom  we 
must  assume  to  be  voluntarily  obeyed  by  them.  The  division 
of  the  produce  would  in  like  manner  be  a  public  act.  The  prin- 
ciple might  either  be  that  of  complete  equality,  or  of  apportion- 
ment to  the  necessities  or  deserts  of  individuals,  in  whatever  man- 
ner might  be  conformable  to  the  ideas  of  justice  or  policy 
prevailing  in  the  community. 

Examples  of  such  associations,  on  a  small  scale,  are  the  mo- 
nastic orders,  the  Moravians,  the  followers  of  Rapp,  and  others : 
and  from  the  hopes  which  they  hold  out  of  relief  from  the  mis- 
eries and  iniquities  of  a  state  of  much  inequality  of  wealth, 
schemes  for  a  larger  application  of  the  same  idea  have  reap- 
peared and  become  popular  at  all  periods  of  active  speculation 
on  the  first  principles  of  society.  In  an  age  like  the  present, 
when  a  general  reconsideration  of  all  first  principles  is  felt  to 
be  inevitable,  and  when  more  than  at  any  former  period  of  his- 
tory the  suffering  portions  of  the  community  have  a  voice  in 
the  discussion,  it  was  impossible  but  that  ideas  of  this  nature 
should  spread  far  and  wide.  The  late  revolutions  in  Europe 
have  thrown  up  a  great  amount  of  speculation  of  this  character, 
and  an  unusual  share  of  attention  has  consequently  been  drawn 
to  the  various  forms  which  these  ideas  have  assumed ;  nor  is  this 
attention  likely  to  diminish,  but  on  the  contrary,  to  increase  more 
and  more. 

The  assailants  of  the  principle  of  individual  property  may  be 
divided  into  two  classes:  those  whose  scheme  implies  absolute 
equality  in  the  distribution  of  the  physical  means  of  life  and 
enjoyment,  and  those  who  admit  inequality,  but  grounded  on 
some  principle,  or  supposed  principle,  of  justice  or  general  ex- 
pediency, and  not,  like  so  many  of  the  existing  social  inequali- 
ties, dependent  on  accident  alone.  At  the  head  of  the  first  class, 
as  the  earliest  of  those  belonging  to  the  present  generation,  must 
be  placed  Mr.  Owen  and  his  followers.  M.  Louis  Blanc  and 
M.  Cabet  have  more  recently  become  conspicuous  as  apostles  of 
similar  doctrines  (though  the  former  advocates' equality  of  dis- 
tribution only  as  a  transition  to  a  still  higher  standard  of  jus- 
tice, that  all  should  work  according  to  their  capacity,  and  re- 


12  ECONOMICS 

celve  according  to  their  wants).  The  characteristic  name  of 
this  economical  system  is  Communism,  a  word  of  continental 
origin  only  of  late  introduced  into  this  country.  The  word 
Socialism,  which  originated  among  the  English  Communists,  and 
was  assumed  by  them  as  a  name  to  designate  their  own  doctrine, 
is  now,  on  the  Continent,  employed  in  a  larger  sense ;  not  neces- 
sarily implying  Communism,  or  the  entire  abolition  of  private 
property,  but  applied  to  any  system  which  requires  that  the  land 
and  the  instruments  of  production  should  be  the  property,  not 
of  individuals,  but  of  communities  or  associations,  or  of  the  gov- 
ernment.— J.  S.  Mill,  "Political  Economy,"  Book  II,  Chapter  I, 
Section  2, 


CHAPTER  II 

PRODUCTION 

7.  Production  and  producer  defined. — ^We  have  de- 
termined that  wealth  includes  all  those  commodities  and 
properties  in  the  community  which  can  be  appropriated 
and  which  are  desired  by  man.  This  property  of  being 
desired  we  may  define  as  utility.  Utility  should  be 
sharply  distinguished  from  usefulness.  Many  goods 
may  be  extremely  useful,  such  for  example,  as  a  gallon 
of  water,  but  may  have  no  value  whatever  placed  upon 
them  because  they  can  be  obtained  without  effort  or  sac- 
rifice. A  gallon  of  whiskey,  on  the  other  hand,  may  be 
extremely  harmful  and  yet,  because  of  its  scarcity  and 
the  difficulty  of  producing  it,  as  well  as  because  of  the 
strength  of  the  appetite  to  which  it  ministers,  may  sell  at 
$6.  The  science  of  economics,  however,  is  not  concerned 
with  the  usefulness  of  commodities.  The  only  questions 
which  it  asks  concerning  a  commodity  are,  has  it  utility, 
do  men  desire  it,  will  they  pay  money  for  it  or  put  them- 
selves to  trouble  and  inconvenience  in  order  to  obtain  it? 

We  may  now  define  the  production  of  wealth  as  the 
process  of  increasing  utility.  Any  act  which  directly 
or  indirectly  increases  the  utility  or  desirability  of  a 
commodity  is  an  act  of  production.  The  farmer  clears 
a  piece  of  land,  rendering  it  fit  for  tillage;  he  is  a  pro- 
ducer. The  wholesaler  buys  goods  from  the  manufac- 
turer and  sells  them  to  the  retailer  in  such  quantities 
as  the  retailer  may  conveniently  dispose  of  them  to  the 
consumer;  he  is  a  producer.     The  retailer  places  these 

lid 


14  ECONOMICS 

goods  upon  his  shelves  and  sells  them  in  many  small 
quantities  to  the  consumer;  'he  also  is  a  producer.  Every 
person  who  is  engaged  in  increasing  the  desirabiUty  of 
conmiodities  is  engaged  in  production.  Every  person 
who  is  engaged  in  increasing  the  utility  of  commodities, 
and  this  may  be  determined  by  ascertaining  whether 
he  is  increasing  the  money  value  of  commodities,  is 
engaged  in  production.  It  is  possible,  without  stretch- 
ing the  definition  of  production  too  far,  to  include 
among  the  producers,  a  large  number  of  people  who 
are  not  directly  engaged  in  increasing  the  utility  of 
goods.  The  policeman  may  thus  be  considered  a  pro- 
ducer; the  school  teacher  who  increases  the  efficiency 
of  his  pupils  is  a  producer;  the  official  who  administers 
a  public  department  concerned,  let  us  say,  with  supply- 
ing pure  water  or  light  to  a  community,  is  also  a  pro- 
ducer. 

8.  Forms  of  production. — There  are  four  principal 
forms  of  production.  They  include  those  acts  which 
result  in  creating  (1)  utility  of  place,  (2)  utility  of 
form,  (3)  utility  of  time,  and  (4)  utility  of  possession. 
In  the  business  hfe  of  the  nation,  the  first  set  of  acts 
is  represented  by  transportation;  the  second  by  manu- 
fiacturing;  the  third  by  storage;  and  the  fourth  by  trad- 
ing and  exchange.  All  these  activities  are  forms 
of  production,  as  they  each  result  in  increasing  the  de- 
sirability or  utility  of  certain  commodities.  There  are 
famihar  illustrations  of  these  different  means  of  pro- 
duction. The  miner  blasts  out  iron  ore,  conveys  it  to 
the  surface  of  the  ground,  and  ships  it  by  rail  and 
lake  a  thousand  miles  to  the  blast  furnaces  at  Pitts- 
burgh. These  are  acts  of  production.  The  ore  is  of 
no  use  either  in  the  ground  or  at  the  head  of  Lake 
Superior  where  it  was  mined.     At  the  foot  of  the  Lakes, 


PRODUCTION  15 

however,  it  becomes  of  great  value.  The  blast  furnace 
operating  near  Pittsburgh  purchases  Lake  Superior 
ores  at  the  mines  at  about  $2  per  ton;  carried  to  an 
upper  lake  port  this  same  ore  is  worth  $2.60;  on 
reaching  a  lower  lake  port  its  value  is  $3.05  and  at 
Pittsburgh,  its  destination,  $4.05.  These  successive  in- 
creases in  price  show  the  increase  in  utility  which  have 
resulted  from  the  transportation  of  the  ore  from  one 
place  to  another.  At  the  blast  furnace  men  convert  the 
ore  into  iron  by  mixing  it  with  coke  and  limestone 
and  applying  the  action  of  heat  to  the  mass.  In  iron 
smelting  the  object  is  to  free  the  iron  from  oxygen 
and  various  impurities  which  are  associated  with  it. 
This  is  done  by  mixing  it  with  coke  and  limestone  in 
alternating  layers.  The  mass  is  then  set  on  fire  and 
the  blast  of  air  is  forced  through  it  to  hasten  combustion. 
The  oxygen  is  released  during  the  process,  uniting  with 
the  rocky  material  in  the  iron  ore  and  forming  slag. 
The  iron  is  thus  set  free  and  becomes  heavier,  gradually 
sinking  to  the  bottom  of  the  furnace,  from  which  it  is 
drawn  off. 

We  have  here  production  resulting  in  a  complete 
change  in  form  and  a  still  further  increase  in  value. 
Pig  iron  sells,  say,  at  $16  per  ton.  This  pig  iron  is 
still  further  de-oxidized  and  converted  into  steel  ingots 
and  into  steel  rails  which  sell  at  $28  per  ton.  From 
these  acts  of  mining,  transportation  and  manufacturing, 
creating  place  and  form  utilities,  two  tons  of  iron  ore 
valued  at  $8  ultimately  receive  a  value  of  $28.  Instead 
of  being  made  into  steel  rails,  the  steel  in  the  form  of 
ingots  or  bars  may  be  shipped  to  Philadelphia.  Again 
the  change  in  place  makes  an  increase  in  utility  resulting 
in  an  increase  in  price,  which  corresponds  roughly  to 
the  transDortation  rate  between  the  two  cities.    In  Phil- 


16  ECONOMICS 

adelphia  the  steel  is  made  into  boilers,  another  change 
in  form.  A  boiler  of  standard  quality,  complete  with 
fittings,  weighing  about  33,000  pounds,  is  worth  in  the 
neighborhood  of  $1,250  or  about  $76  per  ton  of  steel 
which  enters  into  it.  These  boilers  are  then  shipped  to 
a  town  in  central  Pennsylvania,  another  change  in  place, 
and  a  further  addition  to  the  utility  and  price.  Set 
up  and  ready  for  use  their  value  will  have  increased  from 
$350  to  $500,  depending  upon  changes  in  location  and 
condition. 

9.  Time  utilities. — Time  utilities  are  of  less  impor- 
tance. Ice  has  in  winter  practically  no  utility,  and  but 
little  of  it  can  be  sold.  By  the  time  warm  weather  ar- 
rives its  utility  has  increased  many  fold.  Wheat,  just 
after  harvest,  ordinarily  sells  at  much  lower  prices  than 
after  it  has  been  kept  during  the  winter.  Here  are  ex- 
amples of  time  utility,  the  increasing  of  the  desirability 
of  an  article  by  holding  it  from  one  season  to  another. 

10.  Possession  utilities. — Possession  utility  arises 
when  a  wholesaler  sells  goods  to  a  jobber  or  when  the  re- 
tail merchant  sells  his  goods  to  a  consumer.  By  a 
change  of  possession  the  goods  sold  gain  in  utility,  a 
fact  evidenced  by  the  increased  price  at  which  they  are 
sold.  A  lot  of  hammers,  for  example,  have  a  certain 
utility  in  the  hands  of  the  manufacturer,  but  the  man- 
ufacturer has  no  means  of  marketing  his  products  to 
the  consumer.  He  therefore  sells  to  the  jobber,  who 
finds  it  profitable  to  sell  hammers  to  small  retailers  in 
dozen  lots,  because  at  the  same  time  he  may  be  selling 
to  the  same  retailer  five  or  six  other  items  also  in  dozen 
lots.  A  gross  of  hammers  in  the  hands  of  the  manufac- 
turer has,  therefore,  less  utility  than  in  the  hands  of 
the  jobber. 

The  manufacturer  may  charge  the  jobber  $46  for  a 


PRODUCTION  17 

gross  of  hammers  which  the  jobber  in  turn  sells  to  the 
retail  trade  for  $54,  and  the  retailer  sells  the  same 
hammers  over  the  counter  to  customers  for  $72  a  gross. 
Again,  goods  bought  by  a  large  department  store  in 
wholesale  lots  have  one  value.  Assorted,  artistically 
arranged  and  ready  for  sale  in  single  units  to  the  cus- 
tomer, they  have  a  much  higher  value.  The  same  illus- 
tration may  be  used  to  show  that  possession  utility  is 
increased  when  the  goods  in  question  are  actually  in 
the  hands  of  the  consumer.  Because  of  this  increase 
he  is  willing  to  pay  a  price  high  enough  to  induce  the 
retailer  to  part  with  his  goods.  In  this  manner  with 
each  transfer  of  the  goods  from  the  possession  of  one 
individual  to  another,  their  utility  and  their  price  in- 
crease, 

11.  Agents  of  production. — There  are  three  agents  or 
factors  in  production,  two  primary  and  one  secondary; 
the  primary  supplied  by  nature  and  by  labor — that  is 
to  say,  muscular  or  mental  activity  exerted  upon  or 
in  connection  with  these  materials  and  forces.  The 
secondary  factor  in  production  is  capital.  This  con- 
sists of  all  the  commodities  employed  not  for  consump- 
tion but  for  purposes  of  future  production.  The  nature 
of  capital  will  be  a  matter  for  subsequent  examination. 

Production  has  already  been  defined  as  the  creation  of  utilities. 
That  man  cannot  create  matter  is  a  familiar  truth.  All  that  he 
can  do  is  to  rearrange  particles  of  matter  so  as  to  create  form 
utilities ;  or  move  goods  from  one  part  of  the  world  to  another 
so  as  to  create  place  utilities ;  or  preserve  goods  from  one  period 
to  another  so  as  to  create  time  utilities ;  or,  finally,  transfer 
goods  from  the  ownership  of  one  individual  to  that  of  another 
so  as  to  create  possession  utilities.  Any  activity  which  con- 
tributes to  the  creation  of  utilities  in  either  of  these  ways  is 

production. 
1—3 


18  ECONOMICS 

A  school  of  French  economists  of  the  eighteenth  century, 
the  Physiocrats,  gave  currency  to  the  behef  that  agriculture 
is  productive  in  a  special  and  peculiar  sense.  They  even  went 
so  far  as  to  characterize  manufacturing  and  mercantile  pur- 
suits as  sterile,  or  unproductive.  Adam  Smith,  writing  in  1776, 
took  vigorous  exception  to  this  view,  but  he,  too,  speaks  of  na- 
ture as  "laboring  along  with  man"  in  farming,  implying  that 
it  does  not  "labor  along  with"  him  also  in  his  other  occupations. 
Completer  knowledge  of  the  real  nature  of  production  has  eman- 
cipated most  minds  from  these  misconceptions.  They  reappear 
from  time  to  time,  however,  in  criticisms  of  the  activity  of  mer- 
chants, who  are  said  to  create  nothing,  but  to  live,  like  parasites, 
by  buying  things  for  less  and  selling  them  for  more  than  they 
are  worth.  The  obvious  reply  to  such  attacks  is  that  merchants 
create  time,  place  and  possession  utilities  and  that  human  well- 
being  depends  as  much  upon  these  as  upon  the  form  utilities 
created  by  farmers  and  manufacturers.  Convincing  proof  of 
the  value  of  the  services  of  merchants  is  furnished  to  city  peo- 
ple when  they  go  to  live  in  the  country  in  the  summer  and  have 
to  depend  for  the  goods  they  require  upon  a  distant  and  ill- 
stocked  country  store.  The  growing  prevalence  among  country 
people  of  the  practice  of  coming  to  town  to  do  their  shopping 
indicates,  on  the  other  hand,  their  practical  appreciation  of  what 
the  merchant  does  for  the  community. 

As  already  implied,  there  are  two  essential  factors  in  all  pro- 
ductive processes:  nature  and  man.  Nature  figures  in  produc- 
tion as  an  aggregate  of  materials  and  blind  forces.  Acting  in 
conformity  with  invariable  laws,  she  destroys  as  readily  as  she 
creates.  Moreover,  her  productive  services  are  always  gratu- 
itous to  him  who  has  the  intelligence  to  command  them.  Man, 
on  the  contrary,  appears  as  a  being  with  conscious  purpose. 
He  also  destroys — not  ruthlessly,  however,  as  nature  seems  to 
do,  but  in  order  to  gratify  his  wants.  In  production  man  is  the 
directing,  active  agent,  nature  the  obedient,  passive  agency. 
Man  marshals  the  materials  and  productive  forces  which  nature 
supplies  in  the  ways  that  experience  has  taught  him  to  be  best, 
and  he  alone  enjoys  the  fruits  of  productive  enterprise. 


PRODUCTION  19 

Man  and  nature  are  the  primary  factors  in  production ;  sec- 
ondary or  derived  from  them  is  capital^  the  products  of  past 
industry  used  as  aids  to  further  production.  With  the  abun- 
dant evidence  on  every  side  of  the  dominant  role  which  power 
machinery  and  other  forms  of  capital  play  in  production  as 
now  carried  on  there  is  little  need  to  emphasize  the  importance 
of  this  third  factor.  To  capital  is  chiefly  due  the  efficiency  of 
contemporary  productive  methods,  as  contrasted  with  those  of 
one  hundred  and  fifty  years  ago,  and  also  the  division  of  the 
working  population  into  employers  and  employes.  These 
truths  are  so  familiar  to  everyone  that  it  is  not  so  much  the 
importance  of  capital  as  the  fact  that  it  is  not  an  independent 
but  a  derivative  factor  in  production  that  requires  emphasis. — 
H.  R.  Seager,  "Economics :  Briefer  Course,"  pp.  60-62. 


CHAPTER  III 

NATURAL  AGENTS 

12.  Free  goods  of  nature  and  their  transformation. — 
In  our  study  of  production  we  have  first  to  examine  the 
function  of  nature  in  the  production  of  wealth.  Of  the 
commodities  which  are  fitted  to  supply  human  wants, 
some  grow  up  spontaneously  as  the  free  gifts  of  nature 
without  any  labor  being  expended  upon  them.  Ex- 
amples of  such  comimodities  are  shellfish,  berries,  fruit 
and  nuts.  In  the  tropics,  the  profusion  of  natural 
products  is  so  great  that  man  can  subsist  without  exert- 
ing more  labor  than  is  necessary  to  gather  the  fruit 
from  the  trees  and  the  fish  from  the  shore.  Fruits  and 
nuts  in  great  profusion  and  almost  endless  variety  fall 
or  hang  from  the  trees.  The  streams  swarm  with  fish, 
which  can  easily  be  caught  at  all  seasons  of  the  year. 
Game  also  is  abundant.  Cold  is  unknown,  clothing  and 
shelter  almost  superfluous.  Under  such  conditions  man 
does  not  need  to  work  and  he  is  content  to  sleep  and  idle 
his  life  away,  sustaining  himself  without  working.  Gen- 
eration after  generation,  century  upon  century  find 
him  still  in  the  same  condition  of  drowsy  indifiPerence. 
Progress  and  improvement  are  not  thought  of,  because 
the  inducement  is  lacking.  Man  is  entirely  comfortable 
and  secure  in  his  comfort.  Man  is  by  nature  little  more 
disposed  than  the  lower  animals  to  hard  work  and  stren- 
uous endeavor. 

In  the  colder  regions  conditions  are  different.  Here 
the  climate  is  harsh  and  inclement.     The  winters  are 

20 


NATURAL  AGENTS  «1 

severe,  locking  up  land  and  water  in  snow  and  ice. 
The  spontaneous  productions  of  the  forest  are  less 
abundant  and  must  be  won  with  more  labor.  In  the 
North  man  must  work  and  work  hard  in  order  to  live. 
Unless  he  works  and  plans,  unless  he  denies  himself 
present  satisfaction  in  order  to  provide  for  future 
wants,  he  will  perish.  Compelled  to  exertion,  he  begins 
to  subdue  the  difficulties  which  encompass  him.  He 
builds  houses  for  shelter.  He  provides  clothing.  In 
order  that  food  may  always  be  at  hand,  he  develops 
agriculture  and  domesticates  animals.  By  slow  degrees 
he  organizes  civil  society,  so  that  by  the  united  strength 
and  cooperative  effort  of  many  hands  his  hard  task  may 
become  easy.  In  short,  he  begins  to  get  the  better  of 
the  physical  conditions  of  soil,  climate,  vegetation  and 
animal  Hfe  which  surround  him.  He  becomes,  as  we 
say,  master  of  his  environment.  It  is  in  those  regions 
where  means  of  subsistence  can  be  provided  only  by 
labor,  that  we  find  the  great  civilization  of  the  world. 

13.  Changes  in  form  and  place  required  by  pro- 
duction.— Generally  speaking  the  materials  supplied  by 
nature  are  only  available  for  human  use  after  changing 
their  form  or  their  place.  There  is  little  resemblance 
between  a  lump  of  iron  ore  and  a  coil  of  wire,  between  a 
bag  of  cocoons  and  a  bolt  of  silk,  or  between  a  pile  of 
sand  and  a  pane  of  glass.  Almost  every  commodity, 
before  it  is  ready  for  human  use,  must  be  subjected 
to  a  long  anterior  series  of  transformations  and  manip- 
ulations. Consider,  for  example,  the  process  of  produc- 
ing a  loaf  of  bread.  The  ground  must  be  cleared, 
ploughed  and  harrowed,  planted  with  seed,  cultivated, 
the  crop  harvested,  the  grain  threshed,  carried  to  the 
mill,  ground  and  bolted,  and  finally  the  flour  must  be 
mixed  and  the  bread  baked. 


2«  ECONOMICS 

Although  the  materials  supplied  by  nature  must  usu- 
ally be  transformed  before  they  are  fit  for  consump- 
tion, the  substances  out  of  which  these  goods  are  made 
are  derived  from  the  ground,  the  forest  or  the  sea. 
Without  an  abundant  supply  of  these  materials,  pro- 
duction is  small.  The  rapid  increase  of  industry  in 
the  United  States,  and  the  assured  industrial  future 
of  this  country  rest  upon  the  foundation  of  abundant 
raw  materials.  In  fuel  of  all  kinds,  in  all  metallic  ores, 
in  lumber  and  in  the  products  of  agriculture,  the  United 
States  is  better  provided  than  any  other  region  in  the 
world.  Out  of  these  materials  the  energy  of  the  Amer- 
ican people,  assisted  by  the  progress  of  invention  and 
improvement  and  helped  also  by  capital  contributed  by 
Europe,  has  created  within  one  hundred  years  the  most 
prosperous  industrial  nation  the  world,  has  ever  seen. 

14.  Latent  powers  of  nature, — Natiu*e  supplies  to 
production  not  merely  materials  but  also  forces  and 
natural  properties  of  which  man  makes  large  and  in- 
creasing use  in  production;  without  whose  aid  indeed 
production,  as  we  now  understand  it,  would  be  impos- 
sible. The  universe  about  us  is  a  vast  reservoir  of 
power.  Power  almost  unlimited  is  latent  in  the  coal 
mines  which  contribute  each  year  to  the  service  of  man 
only  the  minutest  fraction  of  their  stored-up  energy. 
Because  it  is  the  principal  source  of  power,  coal  is 
undoubtedly  the  most  important  of  all  mineral  raw 
materials  of  industry.  In  this  age  of  steam-driven 
machinery,  coal  represents  power,  and  where  nearly 
every  manufacturing  process  is  conducted  on  a  large 
scale  in  huge  mills  and  factories,  cheap  coal  is  essential 
to  economical  production.  At  every  stage  of  the 
economic  process  coal  is  our  servant.  It  smelts  the  iron 
out  of  which  our  agricultural,  milling  and  transporta- 


NATURAL  AGENTS  23 

tion  machinery  is  made.  It  transports  the  grain  to  the 
mill  and  grinds  it  into  flour.  It  carries  the  flour  to 
the  customer  and  finally  converts  it  into  bread.  Coal 
weaves  our  clothing,  saws  and  planes  our  lumber,  fluxes 
our  hard  metals  into  workable  condition,  and  performs 
for  us  almost  every  act  and  process  of  our  modern  life. 
"This  has  been  called  the  iron  age,  and  it  is  true  that 
by  its  strength,  endurance  and  wide  range  of  qualities 
iron  is  the  material  of  novelties  and  is  fitted  to  be 
the  fulcrum  and  lever  of  works,  while  steam  is  the  mo- 
tive power.  But  coal  alone  can  produce  in  sufficient 
abundance  either  iron  or  steam;  coal,  therefore,  com- 
mands this  age — the  age  of  coal.  Indeed,  coal  stands 
not  merely  beside  but  entirely  above  all  other  com- 
modities. It  is  the  material  energy  of  the  country; 
the  universal  aid,  a  factor  in  everything  we  do.  With 
it,  almost  any  feat  is  possible;  without  it,  we  are  thrown 
back  into  the  laborious  poverty  of  early  times."  ^  Power 
is  more  visibly  seen  in  the  rush  of  streams  and  in  the 
heaving  tides.  The  sun  is  every  day  pouring  great 
cataracts  of  power  upon  the  earth.  Compared  with  the 
power  and  force  of  nature,  the  strength  of  men  and 
animals  is  insignificant. 

Most  important  of  these  natural  resources  are  the 
forces  of  the  soil  called  into  action  by  heat  and  moisture, 
whose  operation  is  illustrated  by  the  varied  and  mani- 
fold processes  of  agriculture.  Single  acres  of  land  may 
yield  under  scientific  farming  as  much  as  1,300  pounds 
of  cotton  or  100  bushels  of  corn.  The  force  of  heat  is 
present  in  all  metallurgical  operations  and  also  the  gen- 
eration of  steam.  The  force  of  gravitation  is  now 
utihzed  in  water  power.  The  total  horse  power  em- 
ployed in  manufacturing  in  1909  was  18,680,776.    To 

1  ••  The  Coal  Question,"  W.  S.  Jevons. 


y^ 


24.  ECONOMICS 

supply  this  demand,  it  is  stated  that  Niagara  Falls  is 
capable  of  developing  between  six  and  seven  millions 
of  horse  power,  and  Niagara,  though  the  largest,  is 
only  one  of  many  falls  in  the  country.  Steam  and 
water  power  are  transmitted  into  electric  power,  which 
is  sent  long  distances  from  the  place  of  generation. 
One  of  the  water  power  companies  of  Niagara  Falls 
supplies  a  considerable  amount  of  electric  power  to 
Buffalo.  The  Buffalo  Street  Railways  are  operated  by 
means  of  this  power,  bake  shops  are  run,  street  and 
house  Hghting  is  supplied,  grain  elevators  are  operated 
and  factory  power  is  provided. 

15.  Importance  of  properties  of  matter  in  produc- 
tion.— In  addition  to  these  natural  forces,  a  large  num- 
ber of  qualities  or  properties  of  goods  play  an  impor- 
tant part  in  production.  It  is  the  ductility  of  copper 
that  gives  that  metal  its  high  commercial  value.  There 
are  other  metals  which  are  good  transmitters  of  elec- 
tricity, but  they  fail  to  be  of  service  to  man  in  this 
capacity,  because  they  cannot  so  readily  be  drawn  out 
into  wire.  Hardness  is  an  invaluable  quality.  The 
value  of  steel,  for  many  uses,  increases  in  direct  ratio 
with  its  hardness.  Again,  there  is  the  property  of 
malleability  by  virtue  of  which  property,  iron  and  steel 
can  be  flattened  out  into  large  sheets.  Tenacity  is  an- 
other valuable  property  of  matter.  It  is  the  tenacity  of 
steel  which  makes  possible  our  skyscrapers  and  gigantic 
steel  bridges.  The  force  of  cohesion  makes  possible 
the  manufacture  of  cloth.  These  properties,  along 
with  many  others,  constantly  play  important  roles  in 
the  industrial  life  of  man. 

In  proportion  as  man  has  succeeded  in  getting  mas- 
tery of  these  natural  forces  and  in  utilizing  the  various 
properties  of  matter,  has  material  civilization  developed. 


NATURAL  AGENTS  26 

This  task  of  subjugation  is,  however,  far  from  being 
accomplished.  Only  a  small  fraction  of  the  power 
available  in  nature  is  at  man's  disposal.  For  example, 
only  10  per  cent  of  the  heat  latent  in  coal  is  now 
utilized  in  the  process  of  combustion.  Even  this  small 
amount  of  power  which  man  has,  and  the  incomplete 
utilization  of  the  contributions  of  nature  to  production, 
have  been  sufficient  to  lift  from  his  shoulders  much  of 
the  burden  of  hard  toil  by  increasing  the  efficiency  of  his 
efforts  one  hundredfold.  Our  food,  our  clothing,  our 
houses  and  our  business  are  all  conditioned  by  and  de- 
pendent upon  the  use  of  power  and  the  properties  of 
matter. 

In  a  general  way  nature  may  be  said  to  assist  in  production 
by  furnishing  man  with  standing-room,  with  materials,  and  with 
chemical  and  physical  forces.  The  motor  forces  of  nature  have 
been  utilized  by  man  principally  in  the  forms  pf  the  muscular 
strength  of  animals,  the  motive  force  of  winds  and  streams, 
the  expansive  force  of  steam,  and  the  motive  force  of  electricity. 

A  detailed  classification  of  nature's  contributions  to  produc- 
tion may  next  be  presented.  First,  all  productive  industry  may 
be  influenced  by  atmospheric  or  climatic  conditions.  These 
affect  not  only  the  animal  and  vegetable  productions  of  a  coun- 
try, but  also  the  vigor  and  character  of  the  inhabitants.  Second, 
rivers,  lakes,  and  seas  should  be  mentioned.  These  may  facili- 
tate the  transportation  of  persons  and  products ;  and  may  fur- 
nish man  with  fish,  coral,  sponges,  etc.  Rivers  may  also  sup- 
ply the  water  power  that  turns  the  wheels  of  many  productive 
industries.  Third,  we  must  notice  the  contributions  of  the  land 
surface  of  the  earth.  The  land  contributes  to  production 
standing-room,  plants  and  animals,  mineral  treasures  hidden  for 
the  most  part  below  the  surface,  and  the  mineral  and  vegetable 
elements  that  form  fertile  soils.  Mere  situation  is  often  of  the 
greatest  importance,  as  is  seen  in  the  case  of  a  city  or  country 


26  ECONOMICS 

located  at  an  important  point  along  the  routes  which  the  com- 
merce of  the  world  is  obliged  to  follow. 

Of  the  contributions  of  nature  to  production  some  are  ap- 
propriable, while  others  practically  cannot  be  reduced  to  owner- 
ship by  individuals  or  by  societies.  Land  is  approp,riable,  as 
well  as  the  products  secured  from  the  land.  Air  and  sunlight 
are  for  all  practical  purposes  not  appropriable,  except  in  so  far 
as  the  enjoyment  of  them  may  depend  upon  access  to  certain 
pieces  of  land.  The  waters  of  the  earth's  surface  cannot  be 
appropriated,  except  in  cases  where  access  to  them  depends  upon 
the  control  of  land.  Inland  waters  and  the  borders  of  the  ocean 
to  the  extent  of  three  miles  seaward  are  appropriated  by  the 
nations  that  control  adjacent  territory.  The  appropriable  con- 
tributions of  nature  are  actually  reduced  to  private  ownership 
as  soon  as  they  become  scarce  relatively  to  human  wants.  When 
population  is  scanty,  and  men  lead  a  nomadic  life,  land  is  not 
held  as  private  property.  But  as  numbers  increase,  and  unoc- 
cupied land  becomes  scarce,  the  soil  is  brought  under  private 
ownership. 

Some  writers  have  attempted  to  explain  the  whole  of  man's 
social  as  well  as  his  economic  life  by  reference  to  the  influence 
of  the  natural  surroundings  of  each  community.  In  this  way 
it  is  said  that  the  inland  plains  give  rise  to  a  pastoral  form 
of  economic  life,  that  the  seashore  causes  people  to  live  as 
fishermen,  and  that  forests  produce  the  tribes  of  hunters.  From 
the  natural  affiliation  or  combination  of  these  three  forms  of 
simple  economic  societies,  all  complex  or  civilized  societies  are 
derived.  But  such  a  view  exaggerates,  as  it  is  very  easy  to  do, 
the  extent  to  which  natural  surroundings  determine  the  life  of  a 
people;  and  it  neglects  the  fact  that  man  in  a  thousand  ways 
may  modify  his  environment.  Man  can  reclaim  land  from  the 
sea,  can  irrigate  arid  lands,  can  tunnel  the  Alps,  and  can  con- 
struct a  railroad  through  the  Rocky  Mountains  or  across  the 
Andes.  The  economic  development  of  our  own  country  has  been 
very  greatly  influenced  by  natural  conditions.  The  infertility 
of  the  soil  of  New  England  compelled  that  section  to  utilize 
its  forests  for  ship|  building,  and  its  rapid  streams  for  power 


NATURAL  AGENTS  ^ 

for  manufacturing.  The  fertile  soil  of  the  South  marked  that 
section  out  as  an  agricultural  region.  The  rivers  of  the  Mis- 
sissippi Valley  helped  to  extend  settlements,  and  to  facilitate  the 
rapid  growth  of  the  interior  of  our  continent.  In  general, 
it  may  be  said  that  the  tendency  of  economic  progress  is  to 
free  man  more  and  more  from  the  influence  of  nature.  It  took 
nearly  two  hundred  years  for  English  colonists  to  advance  their 
settlements  from  the  Atlantic  coast  to  the  valley  of  the  Missis- 
sippi. But  the  steamboat  and  the  railroad  enabled  the  people 
of  the  United  States  to  spread  over  the  territory  between  the 
Alleghanies  and  the  Pacific  in  three-quarters  of  a  century.* 

1 C.  J.  BuUock,  "  IntroducUon  to  the  Study  of  Economics,"  pp.  llft-121. 


CHAPTER  IV 

LABOR 

16.  Labor  defined. — Labor  may  be  defined  as  phys- 
ical or  mental  exertion  directed  toward  the  production 
of  wealth.  The  two  forms  of  exertion  are  generally 
united.  Most  forms  of  so-called  brain  work  require 
some  muscular  activity,  and  the  lowest  manual  labor  re- 
quires a  certain  amount  of  intelligence.  There  is  little 
need,  therefore,  to  discriminate  between  the  respective 
contributions  of  brain  and  muscle  to  production.  This 
may  be  proven  by  any  one  who  takes  the  trouble  to 
watch  the  working  of  common  laborers.  Men  are  fre- 
quently found  who  do  double  the  work  of  other  men 
solely  because  in  using  the  pick  or  the  shovel,  or  trun- 
dling the  wheelbarrow,  or  carrying  the  hod,  they  put 
intelligence  into  their  work.  To  look  at  the  matter 
from  the  other  side,  the  labors  of  some  of  our  greatest 
thinkers,  such  as  Herbert  Spencer,  Prescott  and  Pasteur 
have  been  seriously  hampered  by  physical  infirmities, 
and  the  achievements  of  Mr.  Gladstone  were  only  made 
possible  by  a  splendid  physical  constitution. 

17.  Analysis  of  labor. — Labor  consists  of  putting 
things  into  motion.  All  that  motion  does  in  production 
is  to  change  the  position  of  things. 

If  we  examine  any  case  of  what  is  called  action  of  man  upon 
nature  we  will  find  that  the  power  of  nature  or  the  property  of 
matter  do  all  the  work,  when  once  objects  are  put  into  the  right 
position.  This  one  operation  of  putting  things  into  fit  places 
for  being  acted  upon  by  their  own  internal  forces,  and  by  those 

28 


LABOR  29 

residing  m  other  natural  objects,  is  all  that  man  does,  or  can 
do,  with  matter.  He  only  moves  one  thing  to  or  from  another 
place.  He  moves  a  seed  into  the  ground,  and  the  natural  forces 
of  vegetation  produce  in  succession  a  root,  a  stem,  leaves,  flow- 
ers and  fruit.  He  moves  an  axe  through  a  tree,  and  it  falls  by 
the  natural  force  of  gravitation ;  he  moves  a  saw  through  it,  in 
a  particular  manner,  and  the  physical  properties  by  which  a 
softer  substance  gives  way  before  a  harder,  makes  it  separate 
into  planks,  which  he  arranges  in  certain  positions  with  nails 
driven  through  them,  or  adhesive  matter  between  them,  and  pro- 
duces a  table,  or  a  house.* 

18.  Qualities  that  determine  efficiency. — The  qualities 
which  determine  efficiency  of  labor  may  be  classed  under 
three  heads:  physical,  mental  and  moral.  Included  in 
the  first  are  health,  strength  and  energy.  The  mental 
qualities  may  all  be  included  under  intelligence,  and 
the  moral  qualities  under  honesty,  ambition  and  perse- 
verance. 

19.  Physical  efficiency. — The  laborer's  physical  effi- 
ciency depends  upon  two  factors,  inheritance  and 
environment.  The  races  of  man  differ  widely  in  their 
physical  capacities  for  production.  It  has  been  observed 
that  the  Slav,  the  Pole  or  the  Hun,  is  physically  much 
stronger  than  the  Italian,  and  is  capable  of  much  heav- 
ier work.  On  the  other  hand,  the  Italian  is  more  pains- 
taking than  the  Slav.  This  gives  the  Slav  an  advantage 
in  rough,  heavy  work,  such  as  coal  mining,  and  it  gives 
the  Itahan  an  advantage  in  truck  farming  and  other 
forms  of  intensive  agriculture  which  require  close  atten- 
tion and  careful  supervision. 

The  laborer's  efficiency  is  also  very  largely  influenced 
by  his  environment.  By  this  term  "environment"  we 
mean  all  those  conditions  under  which  the  laborer  lives. 

^"Principles  of  Political  Economy,"  J.  S.  Mill,  p.  16. 


80  ECONOMICS 

In  order  that  he  may  do  his  best  work,  he  requires  good 
and  abundant  food,  clothing  suited  to  the  dimate, 
pleasant  home  surroundings,  clean  streets,  pure  water, 
good  government  and  wages  sufficient  not  merely  for 
comfortable  subsistence  but  also  for  saving. 

The  necessity  of  securing  a  proper  physical  environ- 
ment is  now  generally  recognized,  and  is  the  basis  of 
what  is  known  as  "welfare  work,"  or  betterment  work, 
which  is  carried  on  by  large  employers  of  labor  and 
also  by  means  of  legislation  and  administration  which  is 
undertaken  by  the  state.  The  industrial  betterment 
movement  in  the  United  States  is  of  comparatively 
recent  origin.  It  is  only  within  the  last  decade  that 
the  subject  has  been  given  any  attention,  and  its  general 
establishment  has  been  even  more  recent.  Employers 
are  now  coming  to  recognize  that  consideration  for  the 
welfare,  safety  and  loyalty  of  their  employes  is  an  im- 
portant factor  in  commercial  success.  Men  do  not 
engage  in  business  from  philanthropic  motives,  and 
modern  methods  of  factory  management  must  be  based 
not  on  sentiment  but  on  sound  economic  principles. 
The  object  of  any  industrial  enterprise  is  to  make  money 
for  its  owners.  In  order  to  do  this,  expensive  ma- 
chinery is  placed  in  the  factory  where  it  will  do  its  best 
work;  it  is  protected  from  dust,  kept  well  oiled  and  in 
good  repair.  In  like  manner,  workmen  who  operate 
machinery  must  be  kept  in  good  condition  if  the  em- 
ployer is  to  receive  the  greatest  return  for  the  wages  he 
pays.  Good  light,  pure  air,  cheerful  surroundings, 
cleanliness,  provision  for  a  reasonable  degree  of  com- 
fort, all  these  things  have  a  commercial  value.  The 
more  favorable  the  conditions  are  under  which  work  is 
to  be  performed,  the  higher  will  be  the  type  of  work- 


LABOR  31 

men  attracted  to  the  plant,  and  the  more  permanent 
will  be  their  service. 

The  United  States  has  more  factories  of  this  char- 
acter than  any  other  country  in  the  world.  Massachu- 
setts manufacturers  were  the  first  to  interest  themselves 
in  betterment  work.  They  were  soon  followed  by  man- 
ufacturers in  the  middle  western  and  western  states,  and 
last  of  all  have  the  southern  manufacturers  adopted  the 
same  policy.  To-day  some  form  of  industrial  better- 
ment finds  a  place  in  most  successful  factories  and  mills. 

20.  Importance  of  safe  and  sanitary  surroundings. — 
The  most  evident  illustration  of  the  general  interest  in 
industrial  betterment  is  in  the  effort  to  obtain  order  and 
cleanliness  in  and  about  the  works.  New  buildings  are 
usually  built  with  large  window  space  admitting  abun- 
dant light  and  air.  Many  firms  have  gone  far  in  beauti- 
fying the  surroundings  of  their  works  and  have  found 
the  results  very  satisfactory. 

The  most  important  phase  of  the  industrial  welfare 
movement  is,  however,  due  to  the  increased  interest  in 
safeguarding  operatives  from  accidents.  Factory  legis- 
lation during  recent  years  has  done  much  to  reduce  the 
danger  of  accidents,  but  there  are  still  far  too  many  of 
them.  Manufacturers  are  not  eager  to  supply  safety 
devices  upon  machinery  which  is  already  expensive,  and 
operatives  on  piece  work  resent  any  appliance  which 
is  likely  to  restrict  the  output.  A  serious  accident  must 
sometimes  bring  workmen  to  their  senses,  before  they 
appreciate  the  value  of  a  device  installed  for  their  own 
protection.  This  prejudice  against  safety  appliances  is, 
however,  rapidly  being  overcome. 

Great  financial  loss,  especially  during  periods  when 
labor  is  scarce,  may  result  from  ill  health  of  employes. 


32  ECONOMICS 

An  epidemic  of  typhoid  fever  among  the  operatives 
of  a  large  mill  during  1906  was  justly  regarded  as  a 
calamity  similar  in  destructive  effect  to  a  fire  or  flood. 
In  the  best  works  great  care  is  taken  in  accepting  only 
those  employes  who  are  physically  sound.  Those  al- 
ready employed  who  are  affected  by  tuberculosis  are 
especially  provided  for,  an  effort  being  made  to  isolate 
them  from  other  employes,  while  new  applicants  are 
not  accepted.  Persistent  efforts  are  being  made  to 
combat  alcoholism.  Some  of  the  largest  employers  of 
labor  will  not  employ  drinking  men  and  have  even  car- 
ried their  opposition  so  far  as  to  discharge  employes 
who  are  seen  entering  a  saloon.  The  hygienic  conditions 
of  the  factory  receive  closest  attention.  Wash  rooms 
with  individual  basins  are  common,  and  even  shower 
baths  are  sometimes  provided.  Ventilated  closet  lock- 
ers are  now  considered  necessary.  One  factory  at- 
tracted a  large  number  of  employes  from  a  neighboring 
works  by  putting  a  steam  pipe  under  its  closet  lockers. 
Workers  arriving  on  a  wet  morning  changed  their  wet 
clothes  and  shoes  for  others  dry  and  warm  and  at  night 
found  their  street  suits  thoroughly  dried  for  their  re- 
turn home. 

Medical  service,  ranging  from  the  treatment  of  small 
diseases  and  facilities  for  rendering  first  aid  to  the  in- 
jured, up  to  hospitals  with  complete  equipment,  is  pro- 
vided in  modern  factories.  The  Colorado  Fuel  and 
Iron  Company  has  a  splendid  hospital  at  Pueblo  in  addi- 
tion to  simpler  forms  of  medical  relief  in  the  various 
camps.  The  Illinois  Steel  Company  at  South  Chicago 
maintains  a  hospital  with  constant  medical  and  surgical 
attendance. 

21.  Views  of  a  work's  manager  on  industrial  beP 
terment. — These  improved  systems  are  described  as  foL 


LABOR  88 

lows  by  Mr.  Alexander  E.  Outerbridge,  Jr.,  in  an 
article  published  in  the  Annals  of  the  American  Acad- 
emy of  Political  and  Social  Science  for  January,  1903: 

Another  important  consideration  of  such  innovations  as  the 
premium  system  is  a  care  for  the  well-being  of  the  employes. 
In  my  discussion  of  business  and  philanthropy  I  do  not  wish 
to  be  misunderstood  or  to  seem  to  under-rate  the  advantages 
which  may  accrue  to  employes,  as  well  as  to  employers,  of  philan- 
thropic plans  devised  for  the  aid  of  sick,  injured  or  infirm 
operatives.  In  one  of  the  largest  and  most  successful  manu- 
facturing establishments  in  the  world  an  admirable  system  is  in 
vogue  whereby  unfortunate  men  are  helped  in  time  of  need,  but 
so  judiciously  and  secretly  is  this  done  that  the  world  knows 
nothing  about  it,  and  if  I  should  name  the  establishment  it  would 
violate  confidences  that  I  have  received,  not  from  the  managers 
of  the  works,  but  from  men  who  have  been  thus  aided  in  a  way 
which  has  not  awakened  any  other  feeling  than  that  of  grati- 
tude. You  cannot  find  any  allusion  to  these  matters  in  the 
rules  posted  up  in  the  works,  and  in  fact,  I  believe  there  are  no 
rules  on  that  subject.  There  is  no  contract  in  existence;  there 
is  no  guarantee  that  if  a  man  is  injured,  or  if  he  is  sick,  or  in 
trouble,  that  the  helping  hand  will  be  extended  to  him,  yet  I 
doubt  not  that  every  one  of  the  thousands  of  men  employed 
in  those  shops  goes  to  his  daily  work  with  a  contented  feeling 
that  should  an  accident  befall  him  while  on  duty,  his  family 
would  be  cared  for  while  he  might  be  incapacitated  for  work. 
It  thus  appears  evident  from  whatever  point  of  view  the  question 
may  be  studied  that  the  value  of  the  "personal  equation"  in  the 
management  of  large  industrial  works  is  a  most  important  factor 
in  the  successful  conduct  of  affairs. 

Moreover,  my  views  are  pronouncedly  towards  recognizing 

the  responsibility  which  rests  upon  the  employer  to  the  fullest 

extent    practicable,    not,    however,    based    upon    philanthropic 

grounds,  but  because  observation  has  taught  me  that  one  of  the 

most  profitable  investments  of  money  that  can  be  made  in  a 

manufacturing  plant  is  to  give  the  largest  possible  advantages, 
1—3 


34.  ECONOMICS 

in  the  way  of  conveniences  and  sanitary  arrangements,  etc.,  to 
the  operatives.  I  remember  years  ago  finding  it  a  difficult  mat- 
ter to  impress  upon  the  superintendent  of  a  foundry  the  im- 
portance of  having  the  windows  washed.  They  had  not  been 
washed  for  years,  and  on  dark  winter  days  the  dimness  in  the 
foundry  necessitated  artificial  light ;  indeed  at  all  times  the  con- 
ditions were  bad  for  the  eyes  of  the  moulders.  I  had  a  great 
deal  of  trouble  to  get  those  windows  washed,  and  yet  I  am  quite 
sure  that  the  cost  was  repaid  in  a  very  few  days  in  the  saving 
of  bad  work.  The  introduction  of  steam  heat  into  another 
foundry  that  I  am  familiar  with  was  a  source  of  expense  that 
the  managers  were  loath  to  incur,  but  that  was  also  a  profitable 
improvement;  it  avoided  irritating  and  blinding  smoke  in  the 
foundry  on  cold  mornings  caused  by  lighting  wood  shavings  on 
the  dirt  floor;  not  only  did  it  contribute  to  the  comfort  of  the 
men,  but  the  steam  heat  kept  the  sand  warm,  and  the  moulds  did 
not  crumble  as  formerly  by  reason  of  the  freezing  of  the  mois- 
ture in  the  sand  on  cold  nights.  The  introduction  of  shower 
baths,  dressing  rooms,  water  closets,  and  other  similar  comforts 
and  conveniences,  improves  the  character  of  the  work  and  con- 
serves the  health  of  the  workmen.  I  maintain  that  every  oper- 
ative who  gets  sick  in  the  employ  of  a  concern  causes  more  or 
less  loss,  even  though  he  may  receive  no  wages  during  the  time 
he  is  incapacitated  for  work;  another  and  presumably  an  in- 
ferior or  less  experienced  man  must  be  put  in  his  place  and 
the  interests  of  the  firm  must  therefore  suffer.  For  this  reason 
I  believe  that  every  kind  of  legitimate  comfort  and  convenience 
that  may  be  provided  for  the  operatives  is  a  source  of  profit  to 
the  employer  altogether  apart  from  the  moral  obligation  to  care 
for  the  health  and  comfort  of  the  employe. 

22.  Factory  legislation. — The  safeguarding  of  the 
health,  safety  and  comfort  of  employes  is  not  left  en- 
tirely to  the  self-interest  of  the  employer.  The  state 
has  taken  cognizance  of  these  necessities  in  a  large  num- 
ber of  so-called  factory  laws. 

There  is  not  a  state  in  the  Union  that  does  not  have 


LABOR  35 

some  factory  legislation.  In  many  states  the  laws  go 
into  great  detail.  It  requires  almost  a  thousand  pages 
of  a  finely  printed  government  report  to  contain  the 
factory,  woman  and  child  labor  laws  of  the  respective 
states.  Unfortunately,  not  all  the  laws  of  the  various 
states  show  the  same  amount  of  wisdom  and  breadth  of 
view,  but  there  seems  to  be  a  growing  tendency  toward 
greater  uniformity  and  higher  standards. 

The  factory  law  proper  usually  includes  sections  on 
fire  escapes,  fire  extinguishers,  safety  devices  on  ele- 
vators, guards  for  machinery  and  similar  subjects. 
Labor  laws  usually  include  certain  restrictions  on 
woman's  labor.  She  may  not  engage  in  certain  occupa- 
tions, e.  g.,  manual  labor  in  or  about  any  mine.  She 
is  prohibited  from  working  over  a  definite  number  of 
hours  per  day  and  per  week.  Often  seats  and  other 
physical  comforts  are  guaranteed  her  by  law.  The 
state  thus  limits  her  freedom  of  contract  on  the  ground 
of  the  future  welfare  of  the  race.  The  courts  have  up- 
held this  course  as  part  of  the  police  power  of  the  state. 

The  child  labor  laws  usually  include  four  important 
points:  First,  the  age  under  which  a  child  can  work 
under  no  considerations,  usually  fourteen  years  in  the 
northern  states.  Second,  the  requirement  that  between 
fourteen  and  sixteen  years  the  child  may  not  work 
unless  it  has  proved  its  age  and  has  a  school  certificate 
that  it  can  read  and  write  the  English  language.  Third, 
night  work  is  usually  prohibited,  if  not  entirely,  then  in 
part.  Fourth,  the  number  of  hours  per  day  and  per 
week  are  prescribed.  These  vary  considerably.  In 
New  York  they  are  eight  per  day  and  forty-eight  per 
week. 

The  circumstances  influencing  health  and  strength  are  well 
understood.     Fresh  air  and  exercise,  good  foodj  adequate  pro- 


S6  ECONOMICS 

tection  from  dampness  and  sudden  changes  in  temperature  and 
the  avoidance  of  all  kinds  of  excesses,  are  the  principal  requisites. 
Of  these  good  food  is  perhaps  the  most  important.  The  human 
body  resembles  a  machine,  and  the  amount  of  work  it  can  do 
depends  very  largely  on  the  quality  and  quantity  of  the  fuel, 
that  is,  the  food,  with  which  it  is  supplied.  At  the  present  time 
vigorous  measures  are  being  taken  in  all  progressive  countries 
to  provide  the  requisites  to  health  and  strength  for  all  classes. 
Sanitation  and  factory  acts  have  been  passed  to  insure  the  health- 
fulness  of  the  conditions  under  which  men  work.  A  great  deal 
of  attention  is  being  given,  especially  in  those  countries  which 
maintain  large  standing  armies,  to  the  question  of  determining 
what  diets  are  best  for  people  doing  different  kinds  of  work, 
and  model  kitchens  are  being  organized  in  the  poorer  quarters 
of  cities  to  teach  people  to  appreciate  nutritious  and  properly 
prepared  foods.  Efforts  to  improve  the  tenement  houses  in 
which  the  populations  of  the  larger  cities  live  are  also  being  put 
forth  and  with  some  success.  Mention  should  also  be  made  of 
the  public  baths,  the  playgrounds  for  children  and  the  open-air 
gymnasiums  which  are  being  erected  in  those  cities  in  Europe 
and  America  which  are  most  progressive  in  caring  for  their 
inhabitants.  Finally,  it  would  be  difficult  to  exaggerate  the 
importance  of  the  efforts  that  are  just  now  being  made  to  stamp 
out  two  of  the  most  devastating  diseases  from  which  the  human 
race  has  suffered,  yellow  fever  and  consumption.  As  is  shown 
by  mortality  statistics,  these  efforts  are  beginning  to  bear  fruit 
in  the  improved  health  of  present-day  city  populations,  but 
much  yet  remains  to  be  done  for  both  city  and  country  people. 
There  is  no  form  of  philanthropic  activity  which  is  more  certain 
to  benefit  mankind  than  that  designed  to  improve  the  conditions 
under  which  the  mass  of  men  live  and  work.  Restored  health 
and  vigor  are  blessings  in  themselves,  but  equally  important  is 
the  fact  that  they  make  for  more  efficient  production  and  enable 
their  possessors  not  only  to  hold  what  they  have  gained,  but  to 
add  steadily  to  their  advantages  through  their  increased  earn- 
ing power.  Every  improvement  that  can  be  made  in  home  and 
factory  surroundings  without  undermining  the  independence  and 


LABOR  37 

self-respect  of  the  population  is  thus  a  certain  means  of  "help- 
ing people  to  help  themselves."  ^ 

23.  Extra-husiness  relations  between  employers  and 
employes. — This  subject  belongs  rather  to  the  field  of 
Sociology  than  to  that  of  business  management,  but 
owing  to  its  bearing  upon  the  management  of  industry 
it  will  here  be  considered.  It  is  a  proposition  almost 
self-evident  that  the  employer's  interest  is  furthered  by 
his  possessing  the  good  will  of  his  employes.  No  man 
will  work  so  well  for  wages  alone  as  he  will  work  when, 
to  the  amount  of  the  wages  he  receives,  is  added  the  con- 
sciousness that  his  employer  is  interested  in  his  welfare ; 
that  he  will  promote  him  as  fast  as  he  deserves  it;  that 
his  employer  will  care  for  him  in  sickness,  and,  so  far  as 
possible,  look  after  his  family  in  case  of  his  death; 
that  his  sons  will  have  the  preference  when  vacancies 
occur  in  the  mill;  that  he  will  be  fairly  paid  for  over- 
time ;  that  his  wages  will  increase  with  the  profits  of  the 
business,  and,  in  general,  that  his  employer  will  do  to 
him  as  he,  the  employer,  would  wish  to  be  done  by  were 
the  positions  reversed.  Many  firms  and  companies  bear 
just  those  relations  to  their  workmen,  and  it  need  hardly 
be  said  that  they  do  not  lose  any  money  by  their  policy 
of  kindness.  Few  businesses  are  so  large  that  the  em- 
ployer cannot  know  something  of  the  circumstances  of 
his  subordinates,  and  friendly  interest  is  an  outlay  which 
never  fails  to  bring  in  large  and  quick  returns. 

Let  us  explain  more  fully  as  to  particulars.  The 
employer  owes  to  his  employes  healthful  surroundings; 
large  and  light  rooms  with  plenty  of  air  space  and  good 
ventilation,  well  warmed  in  winter  and  when  possible 
cooled  in  summer;  he  owes  them  the  best  sanitary  con- 
veniences, and  he  will  not  go  far  astray  if  he  provides 

iH.  R.  Scager,  "Economics:    Briefer  Ck)urse,"  pp.  74r-5. 


38  ECONOMICS 

lockers  for  their  street  clothing.  He  further  owes  it  to 
his  employes  to  protect  them,  as  far  as  possible,  from 
the  risks  incident  to  their  occupation;  to  put  railings 
about  dangerous  machinery,  to  case  belts,  to  put  guard 
rails  on  stairs,  to  sand  slippery  floors,  and  to  see  that 
boilers  are  regularly  inspected.  It  is  an  employer's 
duty  to  do  these  things,  and  for  fear  that  short-sighted 
or  penurious  men  should  neglect  to  do  them,  the  law  in- 
sists that  they  shall  be  done,  prescribes  penalties  for 
neglect  to  obey  its  commands,  and  employs  inspectors 
to  see  that  these  regulations  are  obeyed.  The  employer 
further  owes  to  his  employes  reasonable  hours  and 
Hving  wages,  and  he  owes  it  to  them  and  also  to  himself 
to  take  a  friendly  interest  in  their  welfare.  These  mat- 
ters have  already  been  noticed. 

The  question  now  arises.  Shall  the  employer  go  further 
than  this?  Shall  he  do  more  than  self-interest  directs; 
shall  he  provide  libraries,  gymnasiums,  baths  and  amuse- 
ments for  his  workers,  as  some  employers  have  done 
and  as  most  people  think  that  all  employers  should  do? 
There  is  no  hesitation  in  answering  in  the  negative. 
Philanthropy  of  this  sort  is  altogether  out  of  place  and 
tends  to  pauperize  the  recipients.  A  man  works  for 
wages.  The  self-interest  of  his  employer  and  common 
friendliness  and  humanity  demand  that  the  worker  be 
kindly  treated  and  assisted  in  misfortune.  But  to  go 
further  than  this  is  not  demanded.  It  is  far  better  for 
workmen  to  provide  such  things  for  themselves  than  that 
they  should  be  presented  with  them.  If  living  wages 
are  paid,  a  margin  will  usually  remain  for  luxury  and 
amusement.  Experience  has  shown  that  workmen  pre- 
fer to  take  their  wages  in  cash  rather  than  in  part 
cash  and  part  philanthropy. 


CHAPTER  V 

TRAINING  OF  WORKERS 

24.  Mental  efficiency  of  labor.— The  intelligence  of 
workmen  is  largely  dependent  upon  inherited  qualities. 
Thus  negroes  are  proverbially  stupid,  and  the  Irish 
quick  and  alert.  Each  nationality  differs  from  every 
other  in  the  ability  of  its  members  to  think.  Artistic 
ability  seems  to  be  possessed  in  larger  measure  by  the 
French  than  by  any  other  nation;  the  Germans,  on  the 
other  hand,  are  more  painstaking  and  thorough  in  their 
mental  processes  than  any  other  nationality. 

Although  intelligence  depends  primarily  upon  in- 
heritance, mental  efficiency  can  be  greatly  increased  by 
education.  It  is  especially  important,  and  this  has  not 
as  yet  been  generally  recognized  in  the  United  States, 
that  a  common  school  education  should  contain  the 
largest  possible  amount  of  practical  training.  Manual 
training  should  be  taught  in  the  lower  grades,  and  more 
advanced  technical  instruction  in  the  high  schools.  Edu- 
cation, especially  of  a  practical  character,  may  be  looked 
upon  as  capital  invested  in  the  coming  generation.  It 
makes  individuals  more  valuable,  not  merely  to  society, 
but  to  themselves.  Formerly,  in  the  home  and  in  the 
shop,  the  boy  received  a  quite  complete  training,  not 
merely  general  but  qualifying  him  for  some  handicraft. 
In  the  growing  specialization  in  industry,  however,  and 
especially  with  the  organization  of  industry  into  large 
factories,     such     opportunities     for     training     have 

39 


40  ECONOMICS 

nearly  disappeared.  The  public  schools  are,  there- 
fore, obliged  to  take  upon  themselves  new  obligations. 
The  technical  school  and  manual  training  high  school 
have  been  grafted  on  our  educational  system  to  meet 
the  demands  for. 

boys  who  possess  trained  hands  and  eyes,  .  .  .  boys  who 
are  able  to  plan  and  to  execute,  boys  who  are  industrious  and 
not  afraid  of  overalls  and  jumpers — boys  who  have,  to  a  high 
degree,  the  power  of  applying  knowledge  to  industrial  opera- 
tions. The  value  of  a  good  home  in  the  building  of  character 
is  not  minimized  or  called  into  question,  but  the  changed  en- 
vironment in  and  about  the  home,  its  complete  isolation  from 
productive  industry,  cooking  excepted,  has  caused  it  to  lose  its 
leading  position  as  a  factor  in  industrial  training.  .  .  , 
The  boy  who  goes  into  the  shop  in  early  youth  must  be  taught 
neatness  and  accuracy ;  he  should  understand  the  elementary 
principles  of  wood  and  metal  working,  mechanical  drawing, 
Algebra,  geometry  and  have  a  fair  command  of  the  English  lan- 
guage. If  the  boy  can  be  kept  in  school  until  the  end  of  his 
sixteenth  year,  this  amount  of  training  can  be  given  to  him. 
.  I  believe  that  the  value  of  this  work  has  been  underesti- 
mated. Technical  education  was  introduced  before  manual 
training,  and  when  the  latter  was  first  recognized  it  found  place 
only  in  the  high  school.  Gradually,  grade  by  grade,  it  has  crept 
down  toward  the  kindergarten  until  in  a  few  American  cities, 
manual  training  is  found  in  each  of  the  twelve  grades.  The  uni- 
versal introduction  of  such  work  into  the  public  school  system 
should  be  demanded  by  clear-sighted  employers  and  labor  lead- 
ers ;  but  in  order  that  the  young  man  may  reap  the  benefits  the 
school  age  must  be  raised.  If  the  employer  and  the  employe  will 
unite  on  this  proposition,  it  will  mean  much  in  the  future.  The 
interests  of  both  are  certainly  harmonious  in  this  instance.  A 
well-trained  class  of  workmen  means  the  maintenance  of  indus- 
trial supremacy  and  the  greater  likelihood  of  peaceful  relations 
between    employer    and    employe.     Ignorant,    inefficient    and 


TRAINING  OF  WORKERS  41 

sweated  laborers  are  a  menace  to  industrial  growth  and  develop- 
,  ment.^ 

25.  The  money  value  of  education. — Mr.  J.  M. 
Dodge  of  Philadelphia,  in  a  noteworthy  paper  entitled 
"The  Money  Value  of  Technical  Training,"  has  com- 
puted the  capital  value  of  four  classes  of  employes,  each 
according  to  the  amount  of  preliminary  instruction  which 
they  have  received.  The  first  group  he  calls  the  un- 
skilled labor  group,  the  second  the  shop  trained 
or  apprentice  group,  the  third  the  group  trained  in  trade 
schools,  and  the  fourth,  the  group  educated  in  the  higher 
technical  schools.  The  unskilled  laborer,  with  but 
primitive  training,  works  under  the  immediate  super- 
vision of  a  boss  and  earns  at  the  age  of  twenty-two 
$10.20  per  week.  This  amount  represents  $530.40  a 
year  or,  capitalized  at  5  per  cent,  $10,608.  This  sum, 
then,  $10,608,  is  the  capital  value  of  the  unskilled  la- 
borer; in  other  words,  it  represents  the  amount  which 
he  is  worth  to  himself,  and  also  to  the  community. 

The  apprentice  starts  in  at  $3  per  week,  and  is  worth 
about  $3,000  at  the  outset.  At  the  age  of  twenty,  he  is 
earning  $9  per  week,  and  his  worth  amounts  to 
$9,000.  From  the  age  of  twenty  to  twenty-one  and  a 
half  his  pay  is  increased  to  $13.20  and  his  potential  value 
to  $13,200.  At  the  age  of  twenty-four,  he  earns  $15.80 
per  w^eek  and  his  value  is  $15,800.  In  other  words,  in 
eight  years,  the  capital  value  of  the  shop  trained  appren- 
tice has  increased  $12,800. 

The  third  group  is  composed  of  those  young  men  who 
enter  a  trade  school  at  sixteen  years  of  age,  and  devote 
the  next  three  years  to  acquiring  a  trade  under  com- 
petent instruction.     At  the  age  of  nineteen,  a  trade 

1  Frank  T.  Carlton,  "The  Industrial  Value  of  Manual  Training." 


42  ECONOMICS 

school  man  enters  the  machine  shop,  and  he  can  com- 
mand $12  per  week,  equal  to  the  apprentice  at  twenty- 
one  years  of  age.  The  three  years  at  school  have  in- 
creased his  value  from  $3,000  to  $12,000,  a  gain  of 
$9,000 ;  thus  he  has  caught  up  to  the  apprentice  entering 
the  shop  at  sixteen  and  who  has  been  working  for  five 
years.  Continuing  the  comparison,  at  the  age  of 
twenty-four  the  trade  school  graduate  is  earning  $20  per 
week,  with  a  potential  value  of  $20,000  or  $4,200  greater 
than  that  of  the  shop  trained  man.  He  increases  his 
earnings  up  to  $22  per  week,  a  potential  value  of 
$22,000,  and  he  does  not,  as  a  rule,  go  much  further. 
The  members  of  the  third  group  are  worth,  therefore, 
on  the  average  $6,200  more  to  themselves  than  the  mem- 
bers of  the  apprentice  group,  solely  as  a  result  of  their 
more  thorough  preliminary  training. 

The  fourth  group  is  represented  by  a  boy  of  sixteen 
who  studies  in  a  high  school  until  his  eighteenth  year, 
preparing  for  admission  to  some  technical  institution, 
such  as  the  Massachusetts  Institute  of  Technology, 
Stevens  Institute,  or  Cornell.  Here,  after  four  years 
of  training,  he  is  graduated  at  the  age  of  twenty-two, 
ready  to  begin  practical  work.  His  wages  at  starting' 
are  $13  per  week,  or  the  same  amount  earned  by  the  ap- 
prentice at  the  age  of  twenty-one  and  a  half  and  by 
the  trade  school  group  at  nineteen  and  a  half.  He 
has  apparently  lost  by  his  six  years  of  preparatory 
study,  being  six  months  behind  the  apprentice,  and  two 
and  a  half  years  behind  the  trade  school  graduate.  The 
graduate  of  the  technical  school,  however,  increases  his 
earnings  very  rapidly.  Within  six  months  his  wages 
rise  to  $14  per  week,  and  he  reaches  $15.80  per  week 
nearly  one  year  before  the  regular  apprentice.  In  three 
years'  time,  the  technical  graduate  earns  $22  per  week, 


TRAINING  OF  WORKERS  4S 

surpassing  the  members  of  the  trade  school  group,  and 
his  earnings  continue  to  increase  until  at  the  age  of 
thirty-two,  ten  years  after  entering  upon  his  practical 
work,  the  technical  school  graduate  earns  $43  per  week 
and  his  potential  value  is  $43,000.  Six  years  of 
preparation  have  enabled  him  to  far  outstrip  the  shop 
group  and  the  trade  school  group. 

26.  Tlie  ylace  of  mind  in  production. — The  reason 
for  the  larger  earnings  of  the  technical  school  graduate, 
as  Mr.  Dodge  explains  it,  illustrates  the  place  of  mind 
in  production.  Higher  education,  other  things  being 
equal,  carries  with  it  the  ability  to  earn  these  large 
salaries,  because  these  technically  trained  men  are  "di- 
recting and  making  it  possible  for  large  numbers  of 
laborers,  shop  trained  men,  and  trade  school  graduates 
to  perform  useful  work.  The  draftsman  at  his  board 
may  never  realize  that  as  a  result  of  his  drawing  a 
hundred  men  or  more  are  given  employment.  His  de- 
sign calling  for  structural  steel,  for  example,  could  not 
be  built  were  it  not  for  the  labor  of  many  men  employed 
in  making  and  rolling  the  steel  before  it  reaches  the 
shop.  Then  comes  the  shop  men  to  cut,  punch  and 
shear;  then  the  erectors  to  assemble  the  structure  in 
accordance  with  the  original  plan.  For  this  abihty  and 
knowledge  our  technical  man  is  paid." 

27.  The  importance  of  training  for  business, — Pre- 
liminary training  is  just  as  important  in  the  field  of 
business  as  it  is  in  the  field  of  technical  industry.  The 
average  high  school  graduate  is  a  more  successful  busi- 
ness man  than  the  man  whose  education  does  not  extend 
beyond  the  grammar  grades.  The  graduate  of  a  uni- 
versity is  on  the  average  far  more  efficient  than  the  high 
school  graduate.  No  matter  into  what  branch  of 
activity  a  young  man  proposes  to  enter,  he  will  find  it  a 


44  ECONOMICS 

most  excellent  investment  to  spend  money  upon  pre- 
liminary training. 

The  man  who  succeeds  in  business  must  be  first  of  all 
a  man  who  can  think,  reason  and  plan.  A  man  who 
knows  merely  the  routine  of  a  grocery  or  hardware  store, 
who  knows  how  to  keep  a  set  of  books,  arrange  a  stock 
of  goods,  or  make  out  and  send  a  bill  to  a  customer,  has 
acquired  useful  information  which  will  enable  him  to 
make  perhaps  $40  a  month.  But  if  this  is  all  he 
possesses  as  an  equipment  for  business,  he  cannot  hope  to 
win  the  highest  success.  Success  in  business  means  much 
more  than  a  mere  knowledge  of  routine.  It  implies, 
above  everything  else,  the  power  to  think  independently 
in  one's  chosen  field,  the  ability  to  answer  such  questions 
as  these:  If  I  am  a  butcher  in  a  small  town  in  Penn- 
sylvania, shall  I  accept  an  agency  from  Armour  and 
Company,  or  shall  I  depend  upon  the  surrounding 
country  to  furnish  me  with  supplies?  If  I  am  a  miller 
in  Ohio,  shall  I  introduce  the  roller  process  or  stick  to 
the  old  method?  Or  shall  I  change  from  steam  to  gas 
for  my  power  plant?  If  I  have  men  working  for  me, 
shall  I  pay  them  just  the  current  rate  of  wages  and  work 
them  as  many  hours  as  they  will  work,  or  will  it  be 
economy  for  me  to  shorten  their  hours?  If  I  am  a 
grocer,  shall  I  deal  in  staples  only,  or  put  in  a  line  of 
fancy  goods?  If  I  am  a  dry  goods  dealer,  shall  I  take 
an  agency  for  a  catalogue  house  or  fight  the  catalogue 
house  with  my  small  capital?  These  questions  and 
others  like  them  are  constantly  arising  in  every  business 
man's  experience.  The  men  who  succeed  in  business  are 
the  men  who  answer  such  questions  correctly,  and  they 
are  also  the  men  who  are  able  to  reason  and  discriminate. 

Reasoning  is,  as  its  name  implies,  the  act  or  process 
of  finding  out  the  reasons  for  things.     The  reasoner 


TRAINING  OF  WORKERS  ^ 

constantly  asks  himself:  Why  is  this  fact  as  it  is  in^ 
stead  of  some  other  way?  His  pmictuation  is  all  ques- 
tion marks.  He  may  care  very  little  about  the  way  to 
paint  an  iron  bridge;  he  may  never  have  a  bridge  to 
paint ;  but  he  ought  to  be  interested  to  know  why  an  iron 
bridge  should  be  painted  at  all,  because  if  he  and  his 
fellow  citizens  are  not  informed,  the  neglect  of  some 
county  commissioner  may  cost  the  taxpayers  a  new 
bridge.  Possibly  he  cares  very  little  how  to  make  the 
contracts  for  stone  and  gravel  for  the  country  road ;  but 
he  should  understand  why  a  macadamized  road  is  needed 
and  why  any  but  the  best  road  is  a  waste  of  public  money. 
How  to  do  it  is  a  lesson  which  must  be  learned  differ- 
ently in  every  business  establishment  and  which,  if  the 
learner  is  alert,  he  is  not  long  in  mastering.  Why  it 
should  be  done  is  a  lesson  far  more  important  and  far 
more  difficult. 

28.  Demand  for  university/  trained  men  in  business. — 
Of  recent  years  there  has  been  in  the  United  States  a 
very  considerable  demand  among  members  of  the  com- 
mercial community  for  university  men.  This  applies 
particularly  to  men  with  a  technical  training,  but  it  is 
expected  of  them  that  they  shall  be  more  than  mere 
chemists,  engineers,  etc.  Their  education  is  to  fit  them 
for  dealing  with  men  and  managing  businesses.  With 
a  view  to  this  end,  they  study  economics,  generally  of  a 
very  practical  kind ;  the  methods  and  policies  of  the  large 
trusts,  the  organization  of  labor  and  its  relation  to  indus- 
trial management,  the  modern  problems  of  industrial 
finance,  such  as  the  advantages  and  disadvantages  of 
issues  of  common  or  preferred  stocks  or  bonds,  the 
reasons  for  making  improvements  out  of  capital,  or  out 
of  profits,  and  the  negotiations  for  underwriting  a  new 
issue  of  stock  or  bonds. 


46  ECONOMICS 

Railroads,  insurance  companies,  brokers  and  banking 
houses  are  among  those  who  are  anxious  to  employ  col- 
lege men.  Along  some  Hnes,  the  demands  are  so  great 
that  the  universities  cannot  supply  sufficient  graduates. 
Thus  the  New  York  banking  houses  are  anxious  to 
obtain  men  with  a  good  economic  and  statistical  training 
to  work  in  their  investigation  departments,  which  make 
very  careful  inquiries  before  the  firms  enter  upon  any 
scheme  for  underwriting  the  new  stock  and  bond  issues 
of  any  railroad  or  industrial  concern.  To  meet  this  de- 
mand of  the  business  world  certain  universities  have 
introduced  courses  whose  aim  is  to  provide  just  such 
training.  As  an  example  a  description  may  be  given  of 
a  few  of  the  evening  lectures  in  the  New  York  Univer- 
sity School  of  Commerce,  Accounts  and  Finance.  In 
the  class  in  Business  Organization  and  Statistics,  a 
study  is  made  under  the  guidance  of  a  trained  accountant 
of  the  internal  management  of  a  large  business;  the 
differentiation  of  the  duties  of  the  various  departments, 
the  advantages  of  various  methods  of  organization  as 
regards  economy  and  the  preservation  of  goodwill, 
trade-marks,  local  interests,  etc.  The  course  treats  of 
the  organization  of  corporations  controlling  different 
branches  of  industry,  the  relation  of  one  branch  to  the 
others,  and  the  relation  of  each  to  the  parent  company. 
In  view  of  the  complex  character  of  modern  commercial 
and  industrial  undertakings  in  America,  a  course  of 
study  along  the  lines  indicated  can  be  of  great  advantage 
to  young  men  who  are  aspiring  to  managerial 
positions. 

29.  Effect  of  machine  industry  upon  labor. — Modern 
industry  is  machine  industry.  The  principal  work  of 
skilled  labor  is  in  directing  highly  specialized  machinery. 
It  has  been  claimed  that  the  effect  of  this   narrow 


TRAINING  OF  WORKERS  47 

specialization  upon  the  workman  is  injurious.  There 
can  be  no  question  that  this  objection  to  machinery  is  to 
some  extent  well-founded.  The  man  who  works  at  one 
machine  for  twenty  years  must,  in  the  nature  of  things, 
become  hkewise  mechanical.  To  a  large  extent  he  loses 
the  power  of  independent  thinking  and  the  power  of 
initiative.  On  the  other  hand,  the  effect  of  machinery 
has  been  to  increase  so  considerably  the  earnings  of  the 
working  class  that  it  is  possible  for  them  to  obtain  a 
thorough  common  school  education,  and  in  many  cases, 
a  high  school  education,  before  entering  upon  their 
work.  This  preliminary  training  will  more  than  offset 
the  narrowing  influences  of  subsequent  specialization  of 
their  hfe  work. 

Many  large  establishments,  such,  for  example,  as  the 
Baldwin  Locomotive  Works  of  Philadelphia,  have 
recognized  the  narrowing  influence  of  extreme  specializa- 
tion and  have  arranged  for  a  system  of  apprenticeship 
by  which  young  men  can  be  given  an  all-round  training 
in  their  shops,  in  order  that  they  may  be  qualified  to 
serve  as  bosses  and  foremen.  Mr.  S.  M.  Vauclain, 
superintendent  of  their  enormous  works,  has  described 
their  apprenticeship  system  in  substantially  the  follow- 
ing words : 

30.  Apprentice  system  of  Baldwin  Locomotive 
Works. — The  system  as  in  vogue  divides  the  apprentices 
into  three  classes : 

(a)  First-class  apprentices  are  required  to  have  a 
good  common-school  education  and  are  not  to  be  over 
seventeen  years  and  three  months  of  age.  They  are 
indentured  for  four  years;  and  are  required  to  attend  a 
free  night  school  for  at  least  two  evenings  in  each  week 
during  the  first  three  years  of  the  apprenticeship.  The 
first  year  the  apprentice  is  expected  to  take  up  ele- 


48  ECONOMICS 

mentary  algebra  and  geometry;  and  the  rudiments  of 
mechanical  drawing  during  the  remainder  of  the  two 
years. 

(b)  Applications  for  indenture  in  the  second  class 
of  apprentices  are  from  boys  who  have  an  advanced 
grammar  or  high  school  training  and  who  are  not  over 
eighteen  years  of  age.  The  term  for  this  class  is  three 
years,  and  the  apprentices  are  required  to  attend  a  night 
school  which  shall  teach  them  the  rudiments  of  me- 
chanical drawing  for  the  first  two  years  of  indenture. 

(c)  Third-class  indenture;  this  is  in  the  form  of  an 
agreement  with  young  men  of  twenty-one  years  of  age 
who  are  graduates  of  colleges,  technical  schools,  or 
scientific  institutions,  having  courses  in  the  higher 
mathematics,  natural  science  and  drawing.  They  are 
not  required  to  attend  any  night  classes,  but  in  lieu  of 
this  they  must  read  some  technical  journal  and  turn  in 
a  synopsis  of  the  articles.  This  matter  is  used  for  index- 
ing the  articles  in  the  publication.  The  indenture  in  each 
case  places  upon  the  firm  the  obligation  to  teach  the  ap- 
prentice thoroughly  his  art,  and  to  furnish  him  abundant 
opportunity  to  acquire  a  practical  knowledge  of  the  busi- 
ness. The  employer  is  also  bound  to  retain  the  appren- 
tice in  service  until  he  has  completed  the  term  provided 
for  in  the  indenture,  with  the  reservation  of  the  right  to 
dismiss  the  apprentice  for  cause. 

The  apprentices  are  changed  every  three  months,  and 
the  first-year  apprentice  is  given  experience  of  such  an 
extended  character  as  to  make  him  a  first-class  and 
thorough  mechanic.  At  the  end  of  his  service  he  is 
given  a  bonus  of  $125;  he  is  then  at  liberty  to 
sever  his  connection  with  the  works  and  has  the  means  of 
traveling  half-way  across  the  continent  in  search  of  a  job 
satisfactory  to  him. 


TRAINING  OF  WORKERS  49 

The  course  for  the  first-class  apprentices  is  designed  to 
develop  first-class  mechanics,  and  men  for  all  positions 
of  minor  responsibility;  the  object  of  the  course  for  the 
second  class  is  to  develop  men  for  the  positions  of  con- 
tractors and  sub-foremen.  The  assistant  foremen,  fore- 
men and  executive  staff,  are  developed  from  the  third 
class  of  apprentices,  although  no  hmitation  is  placed 
upon  the  height  to  which  the  members  of  any  class  of  ap- 
prentices may  aspire  or  rise,  and  the  first  class  of  appren- 
tices may,  and  in  some  cases,  do  rise  to  places  of  higher 
responsibility  than  those  held  by  the  third  class. 

31.  Training  shop  superintendents. — It  is  very  essen- 
tial that  men  holding  positions  of  responsibility  should 
acquire  a  habit  of  making  observations  and  keeping  a 
record  of  them,  and  in  this  manner  develop  habits  which 
will  prove  very  valuable  to  them  when  asked  to  look  after 
the  work  of  several  men  or  the  material  required  for  a 
gang  or  shop. 

In  order  to  systematize  this  work,  a  form  is  provided 
for  the  second  and  third  classes  of  apprentices  which 
each  is  required  to  fill  in.  This  form  contains  all  the 
data  necessary  to  establish  piece-work  prices;  the  better 
class  of  apprentices  are  thus  organized  into  an  ele- 
mentary rate  fi:xing  department,  and  information  is 
secured  from  which  can  be  obtained  a  very  accurate 
estimate  of  the  cost  of  labor  or  of  any  piece  of  work. 
The  superintendent  of  apprentices  also  secures  a  very 
accurate  estimate  of  the  cost  of  labor  on  any  piece  of 
work.  The  superintendent  of  apprentices  also  secures 
a  knowledge  of  the  work  being  done  by  each  apprentice 
and  a  means  for  comparing  the  work  of  the  different  ap- 
prentices.    Says  a  well-known  writer: 

The  management  carefully  guards  against  any  tendency  to- 
wards paternalism,   in  an   effort  to  bring  out  the   individual 
1—4 


50  ECONOMICS 

qualities  of  the  apprentices  and  with  the  belief  that  the  ap- 
prentices will  develop  into  better  and  stronger  men  if  they  are 
compelled  to  rely  upon  their  own  resources.  There  are  no  spe- 
cial lectures  and  no  clubs  or  social  features;  the  blue  overalls 
level  all  social  distinctions ;  princes  and  sons  of  men  of  wealth 
work  shoulder  to  shoulder  with  those  less  favored,  and  it  is  such 
an  every-day  experience  as  to  call  for  no  comment. 

It  will  also  be  seen  that  the  plan  is  not  altogether  a  philan- 
thropic one,  for  the  incorporation  of  the  several  features  men- 
tioned before  make  the  system  self-supporting.  The  chief  ad- 
vantage, however,  is  the  development  of  a  loyal,  brainy  set  of 
men  with  a  thorough  training  in  the  mechanic  arts  and  espe- 
cially developed  in  certain  lines.  Those  of  them  that  remain 
will  lend  their  energy  to  assisting  and  building  up  the  business 
of  their  employers  and  are  just  as  proud  of  the  works  and  its 
accomplishments  and  just  as  jealous  of  its  reputation  as  the 
proprietors  themselves,  for  they  consider  themselves  the  children 
of  the  works.  The  m'anufacturing  plant  that  has  a  loyal,  in- 
telligent body  of  workmen  who  make  their  employer's  interest 
their  own,  has  the  very  best  equipment  for  meeting  the  strenuous 
competition  of  the  present  day.  In  order  that  a  manufacturer 
may  manufacture  goods  more  cheaply  than  his  competitor,  he 
must  have  men  in  his  employ  of  the  best  intellect,  of  the  greatest 
industry  and  persistence,  and  loyal  to  him  and  to  the  business  he 
represents. 

32.  Importance  of  moral  efficiency. — Ambition,  per- 
severance and  honesty  depend  upon  both  heredity  and 
environment,  primarily  upon  the  latter.  The  quality  of 
honesty  among  workmen  ought  to  be  far  more  common 
than  it  is.  The  faithful  workman  among  unskilled  la- 
borers is  rare.  The  average  unskilled  laborer  will  steal 
time  from  his  employer  wherever  possible.  He  takes 
no  interest  in  doing  his  work  well,  and  although  he  would 
not  steal  money  or  break  into  a  house,  in  his  business  re- 
lations with  his  employer,  to  whom  he  is  bound  to  give 


TRAINING  OF  WORKERS  61 

faithful  service,  he  is  essentially  dishonest.  It  has  been 
found,  however,  that  fidelity  among  workmen  increases 
as  their  skill  and  intelhgence  increase,  and  their  pre- 
liminary education  has,  therefore,  a  most  important  bear- 
ing upon  the  honesty  with  which  they  perform  their 
work. 

Ambition  and  perseverance,  far  more  than  honesty, 
depend  upon  environment.  Where  the  constitution  of 
society  allows  the  workman  but  a  small  share  of  what  he 
produces,  so  that  the  yield  of  his  labor  is  only  sufficient 
to  provide  the  barest  necessities,  and  where  it  is  difficult 
for  a  man  to  rise  into  a  higher  station  than  that  in  which 
he  was  born,  ambition  has  no  chance  to  develop,  and 
perseverance  extends  only  to  procuring  the  necessities 
of  life.  An  illustration  of  this  is  furnished  by  the  effect 
of  residence  in  the  .United  States  upon  certain  classes  of 
immigrants.  The  Italian  and  other  peasantry,  who  are 
ground  down  at  home  by  high  taxes  and  military  service, 
and  whose  wages,  even  without  these  deductions,  are 
low  enough,  have  no  inducement  to  better  their  condi- 
tion because  they  know  that  it  is  impossible.  These  peo- 
ple, however,  in  the  United  States  where  they  are  favored 
by  just  laws,  are  paid  higher  wages  and  are  secured  in 
the  fruits  of  their  labor,  develop  great  energy  and  ambi- 
tion. Many  of  them  have  accumulated  large  amounts 
of  property  and  risen  to  positions  of  honor  and  influence. 


CHAPTER  VI 

WOMAN  AND  CHILD  LABOR  ! 

33..  TJie  labor  of  women  and  children. — The  labor  of 
women  and  children  is  economical  only  because  it  is 
cheap.  This  labor  supplements  the  labor  of  men,  and  it 
is  therefore  valued  at  a  lower  rate.  Female  and  child 
labor  is  mechanically  less  efficient  but  this  is  no  bar  to 
its  employment  since  mechanical  skill  is  of  decreasing 
importance,  owing  to  the  increasing  use  of  automatic 
machinery,  which  performs  complicated  operations  with 
great  accuracy  and  merely  requires  watching  and  tend- 
ing. The  labor  of  women  and  children  is  particularly 
important  in  the  textile  industries,  where  the  use  of  au- 
tomatic machines  is  so  extensive. 

According  to  the  census  of  1910  the  number  of  per- 
sons under  the  age  of  sixteen  employed  in  the  manu- 
facturing industries  of  the  United  States  was  161,493 
and  in  mining,  8,151.  Probably  several  times  the  total 
for  manufacturing  and  mining  were  employed  in  agri- 
cultural pursuits,  in  domestic  and  professional  service, 
and  in  trade  and  transportation,  but  the  figures  have 
not  been  made  available.  There  has  been  a  great  im- 
provement in  conditions  since  the  census  of  1900. 

The  child  labor  problem  has  assumed  a  particularly 
acute  form  in  the  South,  where  a  large  number  of  "poor 
whites"  from  the  hills  have  gone  down  into  the  districts 
controlled  by  the  newly  erected  cotton  mills,  and  the 
whole  family  has  gone  into  the  mill,  with  the  exception 
of  the  father  who  in  some  cases,  carries  the  dinner  pails 

52 


WOMAN  AND  CHILD  LABOR  58 

to  the  children  and  draws  the  pay  for  the  family  on  Sat- 
urday night. 

It  is  generally  conceded  that  the  effect  of  factory 
work  on  the  average  child  under  fourteen  or  fifteen  years 
is  bad.  In  the  first  place,  we  have  come  to  believe  that 
in  order  to  be  an  efficient  member  of  society,  every  per- 
son should  receive  at  least  a  minimum  amount  of  educa- 
tion. The  child  who  stops  school  at  an  early  age,  goes 
into  the  factory  and  works  for  long  hours  at  some  mo- 
notonous task,  not  only  does  not  learn,  but  actually  for- 
gets what  httle  knowledge  he  was  able  to  secure  before 
going  to  work. 

34.  Moral  and  physical  effects  of  child  labor. — The 
effect  of  the  moral  atmsophere  of  the  factory  upon  the 
average  child  is  a  question  that  has  been  vigorously  dis- 
cussed from  both  sides.  There  can  be  no  denying  the 
fact,  however,  that  a  child  of  tender  years  who  is  placed 
in  contact  with  grown  men  and  women  of  all  kinds  is  in 
a  position  to  learn  much  that  would  not  be  learned  from 
either  school  companions,  school  teachers,  or  members 
of  the  family  at  home.  The  resulting  effect  upon  the 
child's  morals  is  Hkely  to  be  bad. 

The  effect  of  factory  work  on  the  physical  make-up 
of  a  growing  child  is  apparent.  The  natural  tendency 
of  the  child  is  to  play.  It  is  through  play  that  children 
develop  both  mentally  and  physically.  Play  involves 
a  change  of  occupation  at  the  will  of  the  person  who 
is  playing.  In  contrast  with  this  activity,  the  essential 
thing  about  modern  factory  work  is  that  it  is  monot- 
onous, long  continued,  and  continued  at  the  will  not  of 
the  worker,  but  of  the  boss  or  foreman.  The  child  in 
the  factory  is  given  mechanical  things  to  do  because  of 
his  lack  of  skill  and  ability  to  do  better  things.  For 
example,  he  may  turn  in  the  edges  of  a  box  cover,  tie 


54.  ECONOMICS 

a  broken  thread  on  a  spinning  frame,  sort  out  pieces 
of  iron  to  be  made  into  bolts,  or  a  thousand  other  mechan- 
ical operations  which  form  a  part  of  modern  factory 
work.  The  child  who  is  compelled  to  do  one  thing  for  a 
thousand  or  five  thousand  times  a  day,  day  after  day, 
week  after  week,  does  not  grow  and  develop  either  men- 
tally or  physically,  but  is  stunted  in  both  directions. 

In  short,  it  is  fair  to  say  that  the  child  who  is  working 
is,  as  a  rule,  not  developing  intellectually,  may  be  de- 
graded morally,  and  is  apt  to  be  stunted  physically.  The 
maintenance  of  an  efficient  labor  force  in  the  community 
requires  a  development  in  each  person  of  mental,  moral 
and  physical  traits,  and  from  the  standpoint  of  society, 
we  cannot  afford  to  continue  a  system  which,  by  working 
a  child  at  an  early  age,  renders  him  a  less  efficient  pro- 
ducer for  the  rest  of  his  life. 

35.  Indirect  effects  of  child  labor. — Aside  from  the 
effect  of  factory  work,  it  is  interesting  to  note  that  child 
labor  means,  for  the  time  being,  at  least,  a  decrease  in 
the  amount  of  labor  which  may  be  had  by  adults.  For 
example,  in  England  before  the  factory  system  began, 
men  of  skill  and  ability  were  required  to  do  the  spinning 
and  weaving.  The  moment  an  invention  was  perfected 
which  enabled  a  machine  to  do  most  of  the  work,  which , 
merely  required  mechanical  attention  to  see  that  the 
threads  did  not  break,  it  became  possible  to  dispense 
with  the  skilled  man  and  employ  an  unskilled  child.  In 
other  words,  labor-saving  machinery  tended  by  children 
results  in  depriving  adults  of  their  places  in  this  particu- 
lar occupation.  A  well-known  illustration  is  given  of  a 
shoemaker  in  Massachusetts  who  was  working  in  a  fac- 
tory for  $2  a  day.  A  machine  was  invented  and  put  in 
operation  which  did  the  work,  and  this  man  was  dis- 


WOMAN  AND  CHILD  LABOR  66 

missed  and  his  son  of  fifteen  employed  at  $1  a  day  to 
tend  the  machine. 

The  effect  of  child  labor  on  family  life,  and  there- 
fore on  the  social  structure,  is,  to  say  the  least,  detri- 
mental. This  is  particularly  true  of  girls  from  twelve 
to  fourteen  who  go  to  work  in  factories,  and  from  that 
time  till  they  are  married  are  employed  in  factory  work 
from  nine  to  eleven  hours  per  day.  They  have  no  op- 
portunity of  learning  home  duties,  and  when  the  time 
comes  for  them  to  marry,  they  will  be  less  efficient  house- 
wives and  home  makers  than  if  they  had  secured,  either 
at  school  or  at  home,  some  training  that  would  prepare 
them  for  their  Hves  as  wives  and  mothers. 

36.  CJiild  labor  inefficient  and  uneconomical. — It  is 
interesting  to  note  that  child  labor  is  always  more  preva- 
lent in  new  industries  and  in  new  communities  which  for 
the  first  time  are  developing  industries.  In  old  com- 
munities, manufacturers,  as  a  rule,  refuse  to  employ 
children  under  fourteen  and  often  under  sixteen,  on  the 
ground  that  a  child  under  sixteen  is  so  unintelligent, 
irresponsible,  and  reckless  that  it  is  apt  to  waste  more 
than  it  makes.  Such  a  child  is  so  inefficient  that  a  man 
at  twice  the  salary  can  produce  far  more  than  twice  the 
product.  It  is  a  well-known  fact  that  goods  manufac- 
tured in  the  South,  where  child  labor  is  prevalent,  be- 
cause of  their  inferior  quahty,  bring  lower  prices  in  the 
market  than  goods  manufactured  in  the  communities 
where  there  is  not  so  much  child  labor  employed.  The 
community  is  very  generally  coming  to  believe  that  child 
labor  is  not  only  cheap  labor  so  far  as  wages  are  con- 
cerned, but  that  it  results  in  a  cheap  product — cheap  both 
in  price  and  in  quality. 

From  a  national  standpoint,  therefore,  the  employ- 


66  ECONOMICS 

ment  of  small  children  to  do  the  work  of  the  world  is  a 
mistake  because  it  inevitably  leads  to  a  depreciation  in 
the  quality  and  character  of  the  laboring  force  of  the 
community;  first,  because  it  impairs  the  ability  of  the 
child;  second,  because  of  its  effect  upon  the  home  and 
social  life;  third,  because  it  affects  adversely  the  wages 
of  adult  labor;  fourth,  because  it  results  in  a  poorer 
product.  From  every  standpoint,  child  labor  is  detri- 
mental and  should  be  strictly  suppressed  in  the  interest 
of  the  coming  generations. 

37.  Women  in  industry. — In  1900  there  were  about 
5,000,000  women  working  in  gainful  occupations  in  the 
United  States.  The  census  figures  of  1910  report  in 
manufacturing  industries  1,290,389  female  employes. 
About  one-sixth  of  those  gainfully  employed  are 
women  and  there  is  no  important  branch  of  industry  in 
which  they  are  not  engaged. 

The  effects  of  the  entrance  of  women  into  industry 
have  been  variously  estimated,  but  the  causes  are  obvious. 
In  the  first  place,  the  development  of  modern  industry 
has  permitted  a  minute  subdivision  of  labor  which  gives 
each  person  in  an  industry  a  very  small  and  definite  op- 
eration to  perform.  For  example,  a  girl  may  paste  cor- 
ners on  paper  boxes,  or  watch  a  spinning  frame  to  see 
that  the  threads  do  not  break.  These  operations  are 
largely  mechanical,  and  require  speed  and  dexterity 
rather  than  mechanical  ingenuity.  In  the  modern  fac- 
tory, a  regular  machinist  is  employed  to  see  that  the 
machines  are  in  good  condition  and  running  properly, 
while  the  operating  of  each  machine  is  done  by  one  who 
knows  nothing  of  its  mechanism,  but  who  has  mastered 
the  art  of  tending  to  the  needs  of  that  particular  ma- 
chine. The  operator  may  sew  one  seam  on  a  pair  of 
overalls,  or  put  buttons  on  a  coat,  or  stamp  out  pieces 


WOMAN  AND  CHILD  LABOR  57 

of  paper  to  make  Christmas  cards,  or  do  any  one  of  a 
thousand  things,  each  of  which  is  simple,  and  to  be 
learned  in  a  short  time.  A  girl  of  sixteen  or  eighteen 
can  go  to  a  factory,  and  in  a  few  days  learn  to  manage 
a  machine  without  having  any  previous  training  or  ap- 
prenticeship. To  be  sure,  her  efficiency  will  not  be  high 
during  the  first  few  months,  but  she  can  at  least  make  a 
living  at  the  work. 

In  the  second  place,  this  minute  subdivision  of  labor 
permits  of  what  is  known  as  the  standardization  of  in- 
dustry. Each  of  these  small  operations  becomes  fixed 
or  standardized.  No  experience  is  required  to  manage 
a  certain  machine;  the  work  can  be  learned  in  a  short 
time,  and  anybody  with  a  small  amount  of  training  can 
carry  on  this  part  of  a  productive  operation.  It  is  not 
necessary  to  keep  the  same  person  at  work  on  the  same 
machine,  for  so  long  as  the  machine  is  kept  going,  pro- 
duction continues.  That  is,  production  depends  not 
upon  the  individuality  of  the  worker,  but  rather  upon 
the  continued  operation  of  a  standard  machine. 

38.  Women's  wages  lower  than  men's. — The  third 
reason  for  the  entrance  of  women  into  industry  is  the 
possibility  of  their  working  considerably  cheaper  than 
men.  A  man  in  industry  requires  a  wage  sufficient  to 
maintain  himself  and  his  family,  whereas  many  women 
living  at  home,  with  little  or  nothing  to  do,  are  willing 
to  go  into  industry  in  order  to  secure  spending  money 
or  enough  money  to  guarantee  them  the  little  necessi- 
ties and  luxuries  of  Hfe  that  a  young  woman  naturally 
desires.  As  a  rule,  these  women  are  single,  have  no  one 
dependent  on  them  and  in  many  cases  can  secure  their 
living  at  home.  Thus  they  are  willing  to  work  for  fifty 
or  seventy-five  cents  or  a  dollar  a  day,  whereas  a  man 
cannot  support  a  family  and  work  in  the  same  industry 


68  ECONOMICS 

for  less  than  $2  a  day.  In  consequence  women  are  em- 
ployed and  men  leave  the  industry.  This  is  particularly 
true  in  such  an  industry  as  cigar-making,  which  requires 
dexterity  rather  than  strength.  Cigars  which  were 
formerly  rolled  by  men  for  seventy-five  cents  or  eighty 
cents  a  hundred  are  now  rolled  in  some  factories  by  girls 
for  thirty-five  or  forty  cents.  Men  are  forced  out  of 
the  industry  because  they  canot  afford  to  work  at  such 
low  wages,  whereas  girls,  ranging  in  age  from  sixteen 
up,  are  very  willing  to  receive  $3  or  $4  a  week  for  their 
efforts. 

Had  labor  not  been  subdivided  and  industry  stand- 
ardized, women  would  have  found  it  difficult  to  enter 
many  industries;  but  with  the  development  of  machinery 
leaving  to  the  worker  only  quick,  mechanical  movements 
to  perform,  women  are  often  more  desirable  than  men 
because  of  their  greater  dexterity  and  quickness. 

39.  Women  in  factory  industry. — From  the  stand- 
point of  industry,  these  are  the  prime  causes  leading 
women  to  take  up  industrial  pursuits,  but  one  of  the 
chief  things  that  has  led  young  women  staying  at  home 
to  go  into  industry  has  been  the  fact  that  nearly  all  of 
the  industries  which  were  formerly  carried  on  at  home 
are  now  carried  on  in  factories  on  a  large  scale.  Spin- 
ning and  weaving  and  the  manufacture  of  clothing  were 
the  first  things  to  leave  the  home.  Although  in  some 
mountainous  districts  of  the  South  clothing  is  still  spun 
and  made  up  at  home,  the  great  majority  of  people  in 
the  United  States  to-day  wear  factory-made  cloth  and 
clothing.  A  hundred  years  ago  factory-made  cloth  and 
clothing  were  the  exception  and  not  the  rule. 

The  changing  of  spinning  and  weaving  from  a  home 
industry  to  a  factory  industry  meant  that  all  persons 
who  were  engaged  in  these  industries  must  move  into 


WOMAN  AND  CHILD  LABOR  59 

towns,  because  only  in  towns  could  a  factory  system  be 
carried  on  when  the  transportation  was  as  defective  as 
it  was  in  the  early  part  of  the  19th  century.  This  mov- 
ing into  towns  meant  that  people  would  no  longer  be  able 
to  keep  chickens  and  cows  and  the  women  of  the  house- 
hold were  therefore  deprived  of  another  occupation, 
namely,  tending  the  chickens  and  cows  and  taking  care 
of  the  milk  and  making  butter. 

Then  the  manufacture  of  underclothing  and  stockings 
was  undertaken  in  factories  with  exactly  the  same  result. 
People,  instead  of  engaging  in  these  occupations  at 
home,  bought  the  factory-made  goods  because  they  were 
cheap.  At  the  same  time,  in  order  to  buy  factory-made 
articles,  they  moved  to  town  to  secure  employment  in 
the  factories.  Thus  the  making  of  clothing  in  factories 
instead  of  at  home  removed  from  the  women  of  the 
household  a  great  group  of  occupations  which  had 
formerly  taken  up  a  large  part  of  their  time. 

Within  the  past  twenty  years,  the  preparation  of  food 
stuffs,  another  great  group  of  consumption  goods,  has 
been  relegated  to  the  factory.  Until  recent  years,  bread 
was  baked  at  home.  Now  one  bread  company  located 
in  a  city,  for  example,  Buffalo,  sends  bread  to  small 
towns  two  hundred  miles  away.  Meat  was  formerly 
killed  and  dressed  at  home.  It  is  now  killed  in  the 
Middle  West  and  delivered  dressed  to  all  parts  of  the 
world.  Most  households  no  longer  make  their  own  soap, 
but  buy  the  product  ready  made.  The  same  is  true  of 
canned  fruit  and  vegetables.  Successful  factory  proc- 
esses have  been  devised  by  which  they  are  prepared  in 
factories  and  shipped  far  and  wide  to  the  consumer. 
Cakes,  cookies  and  crackers  and  breakfast  foods  are  also 
prepared  in  factories  and  shipped  to  all  parts  of  the 
country  "pre-digested"  and  ready  to  eat. 


60  ECONOMICS 

Thus  of  the  three  occupations,  sewing,  cooking  and 
cleaning  which  women  formerly  performed  at  home, 
two,  sewing  and  cooking,  are  carried  on  in  the  factories, 
while  the  cleaning  still  remains  a  problem.  Much  of 
this,  however,  has  been  shifted  to  the  laundry  and  auto- 
matic carpet-cleaning  companies,  and  within  a  genera- 
tion woman  will  be  deprived  of  practically  every 
occupation  which  was  formerly  considered  to  be  in  her 
home  sphere.  Therefore,  when  a  girl  finishes  her 
schooling  there  is  no  possibility  for  her  to  engage  in 
any  occupation  at  home,  and  she  naturally  follows  the 
occupations  which  have  left  the  home  and  gone  to  the 
factory. 

A  minute  subdivision  of  labor  and  a  standardization 
of  industry  have  made  it  possible  for  women  to  enter 
industry;  the  wish  to  supplement  the  family  income  or 
the  necessity  for  so  doing,  and  the  absence  of  home  em- 
ployments, due  to  the  replacement  of  home  industry  by 
factory  industry,  have  made  the  woman  desirous  of 
entering  industry;  and  these  two  causes,  working  side 
by  side  with  the  possibility  of  woman's  working  cheaply 
and  the  superior  ability  of  women  to  carry  on  stand- 
ardized industry  have  led  to  the  great  rush  of  women 
into  gainful  occupations. 

40.  The  'problem  of  women  in  industry — argument 
against. — 1.  Woman  is  the  home  maker  and  she  should 
perform  that  function  and  no  other,  as  it  is  not  possible 
for  any  one  to  do  two  things  well  at  the  same  time. 

2.  Children  can  be  brought  up  properly  only  when 
subject  to  the  constant  care  of  the  mother,  and  this  can- 
not be  given  if  the  mother  is  working  a  large  part  of 
her  time  in  an  occupation  apart  from  the  home. 

3.  Factory  labor  injures  women  much  more  than  it 
injures  men.     Women  are  so  constituted  physically  that 


WOMAN  AND  CHILD  LABOR  61 

long  standing  or  arduous  work  is  apt  to  result  seriously. 

4.  The  work  of  women  results  in  cutting  down  the 
wages  of  men. 

5.  The  working  of  married  women  has  a  serious  effect 
on  the  coming  generation  of  children. 

41.  ^Arguments  in  favor  of  women's  labor. — On  the 
other  hand,  those  in  favor  of  women  engaging  in  in- 
dustry maintain  that — 

1.  There  is  little  left  for  a  woman  to  do  at  home,  and 
that  as  it  is  bad  to  be  idle,  it  logically  follows  that  she 
should  go  into  the  f  actor)\ 

2.  A  woman  working  at  home  is  working  all  the 
time,  whereas  if  she  engages  in  factory  work  her  hours 
are  definite  and  limited. 

3.  Women  are  not  caring  for  children  all  the  time 
even  when  they  remain  at  home,  because  of  the  fact  that 
the  children  are  in  school  during  a  large  part  of  the  day. 

4.  With  our  standardized  industry,  the  physiological 
differences  between  man  and  woman  need  play  no  part 
in  the  controversy,  because  the  continuance  of  a  given 
operation  does  not  require  the  constant  presence  of  one 
operator,  but  may  be  carried  on  one  week  by  one  person 
and  the  next  week  by  another. 

5.  The  entrance  of  women  into  industry  makes  them 
independent.  Heretofore,  women  in  poorer  and  larger 
families  were  compelled  to  get  married  in  order  to 
relieve  their  fathers  of  the  burden  of  taking  care  of 
them.  The  results  of  such  forced  marriages  were  in 
many  cases  unhappiness  and  misery.  Under  the  new 
system,  women  as  independent  wage  earners  can  ac- 
tually assist  their  father  in  taking  care  of  the  home,  and 
need  marry  only  when  they  find  a  congenial  person. 

6.  The  entrance  of  women  into  industry  places 
women  and  men  on  an  equality,  whereas  under  the  old 


62  ECONOMICS 

system,  man  alone  earned  a  livelihood  and  women  were 
constantly  subjected  to  the  disagreeable  necessity  of  ask- 
ing the  men  for  money.  The  placing  of  women  and 
men  on  an  equality  means  democracy  in  its  highest  form, 
because  in  a  democracy  there  are  no  superiors  and  no 
inferiors.  This  development  of  women  will  mean  a 
higher  standard  of  children — children  of  more  character 
and  independence. 

7.  It  is  not  fair,  when  the  work  of  the  world  is  done 
so  largely  by  machines,  to  require  the  women  to  do  the 
drudgery.  It  is  not  necessary  to  banish  her  to  the  tub, 
the  needle  and  the  hot  stove,  while  man  engages  in  more 
interesting  and  enjoyable  pursuits. 

8.  Women  are  needed  in  industry  because  they  can 
there  produce  far  more  than  they  could  at  home.  In 
modern  standardized  industry,  women  are  often  more 
skilled  and  therefore  more  productive  than  men,  because 
the  heavy  work  is  all  done  by  machinery  and  only 
dexterity  and  skill  are  required.  Women  often  possess 
these  qualities  to  a  higher  degree  than  men,  and  besides, 
women  as  a  whole  are  steadier  and  more  reliable  workers. 
All  modern  inventions  and  improvements  tend  to  place 
women  on  a  level  with  men  and  give  them  the  same 
advantages  in  the  industrial  world. 

The  controversy  is  not  yet  ended,  and  each  person  is  at 
liberty  to  draw  his  own  conclusions.  Without  ques- 
tioning the  validity  of  the  arguments  on  either  side,  it 
is  undoubtedly  true  that  more  women  are  going  into  in- 
dustry every  year  because  of  the  possibilities  which  mod- 
ern industry  presents  to  them  to  become  effective  earners, 
and  because  of  the  necessity  of  having  some  occupation. 
Unquestionably  women  are  in  industry  to  stay.  The 
problem  of  society  is  so  to  mold  industry  that  it  may  not 
injure  the  women  who  engage  in  it. 


CHAPTER  VII 

CAPITAL 

42.  Primitive  man  compared  with  civilized  man. — 
Nature  and  labor  are  the  primary  elements  in  produc- 
tion. All  the  wealth  of  the  world  has  been  produced 
by  the  cooperation  of  these  two  factors.  We  have, 
however,  merely  to  look  about  us  in  order  to  discover 
that  man  unaided  can  make  use  of  none  of  the  abundant 
materials  and  mighty  forces  by  which  he  is  surrounded. 

There  is  no  more  helpless  object  than  a  man  turned 
adrift  in  a  wilderness  without  tools  or  weapons  and  left 
to  find  his  subsistence.  He  is  unable  to  secure  any 
vegetable  food  except  nuts,  wild  fruits  and  berries. 
Animal  food,  even  if  he  were  strong  enough  to  catch 
and  kill  it,  he  cannot  eat  uncooked,  and  he  has  no  fire. 
He  requires  clothing  to  cover  him,  and  clothing  is  not 
to  be  had.  For  shelter,  he  must  dispute  with  the  beasts 
for  the  caves  and  burrows  in  which  he  will,  moreover, 
soon  perish  from  cold  or  wet.  In  a  word,  man  placed  on 
a  level  with  the  beasts,  left  to  work  out  his  salvation 
with  tooth  and  claw,  is  in  a  hopeless  plight.  In  a  state 
of  nature,  if  such  a  state  ever  existed,  his  situation  is 
indeed  deplorable.  The  miserable  condition  of  the 
lowest  tribes  of  savages,  such  as  the  Bushmen  of  South 
Africa,  or  the  natives  of  Australia,  show  how  narrow 
is  the  remove  from  man  in  a  state  of  nature  to  the 
beasts  of  the  field. 

From  man  as  we  have  pictured  him,  to  man  as  he  is, 
is  a  great  distance.     The  lord  of  creation,  master  of  the 

63 


64.  ECONOMICS 

earth  and  the  sea,  with  all  things  put  under  his  feet; 
there  is  little  resemblance  between  the  two  pictures. 
Civilized  man  draws  upon  every  part  of  the  earth  for 
his  subsistence.  Upon  his  breakfast  table  appear  the 
contributions  of  every  clime.  His  clothing  and  housing 
enable  him  to  live  in  comfort  in  a  climate  in  which  he 
would  otherwise  soon  perish.  Instead  of  spending  his 
entire  time  and  energies  from  early  childhood  in  the 
struggle  for  the  means  of  subsistence,  one-fourth  of  his 
active  life  is  usually  unproductive,  being  spent  under 
the  care  of  his  parents  or  at  school,  and  much  of  the  re- 
mainder is  given  to  recreation.  His  whole  existence  is 
artificial.  His  food  is  prepared  for  him,  and  bears  little 
or  no  resemblance  to  its  original  elements.  His  clothing 
transforms  his  appearance.  He  passes  his  life  in  a 
world  of  which  his  early  ancestors  knew  nothing.  By 
the  telegraph  and  telephone  he  has  annihilated  space  for 
purposes  of  communication  and  by  the  steamship  and  the 
railway  he  has  reduced  the  world  to  one-tenth  of  its  orig- 
inal size.  It  is  necessary  that  we  should  fix  this  compari- 
son carefully  in  our  minds,  for  the  great  gulf  which  it 
presents  between  man  in  a  state  of  nature  and  man  as 
we  find  him  in  modern  society,  has  been  spanned  by  the 
use  of  capital. 

43.  Capital  defined. — Capital  may  be  defined  as  the 
sum  of  the  machinery  and  materials  of  production. 
The  goods  which  we  are  consuming  and  those  which  we 
expect  to  consume  make  up  only  a  small  part  of  the 
total  mass  of  material  wealth.  This  is  quickly  seen  by 
a  survey  of  the  following  table  taken  from  a  volume 
entitled  "Wealth,  Debt  and  Taxation,"  published  by 
the  United  States  Census  Bureau.  It  gives  what  is 
doubtless  the  most  accurate  and  careful  estimate  ever 
made  of  the  total  wealth  of  the  United  States.     The 


CAPITAL  65 

estimate  is  made  for  the  year  1900  and  the  year  1912. 
In  the  former  year  the  total  value  of  all  property  in  the 
United  States  is  set  at  $88,500,000,000.  In  the  latter 
year  the  total  was  $187,739,071,090.  The  census  esti- 
mate of  1912  classes  the  total  wealth  of  the  United  States 
as  follows: 

Real   propertj    and   improTements $110,676,333,071 

Live  stock   6,238,388,985 

Farm  implements  and  machinery 1,368,224,548 

Manufacturing  machinery,  tools  and  implements 6,091,451,274 

Gold  and  silver  coin  and  bullion 2,616,642,734 

Railroads   and  their  equipment 16,148,632,502 

Street  railways,  shipping,  water  works,  electric  light  and 
power   systems,   telegraph    and    telephone   systems    and 

canals    10,265,207,321 

All  other  property  —  products  of  agriculture,  manufactures 
and  mines,  merchandise,  clothing,  furniture  and  miscel- 
laneous personal  property 34,334,290,655 

No  more  than  one-tenth  of  the  property  of  the 
United  States  is  represented  by  goods  ready  for 
consumption — "consumption  goods"  so  called.  The 
remainder  is  made  up  of  "capital  goods,"  goods 
used  for  purposes  of  further  production.  In  this 
class  are  included,  as  we  have  just  seen,  the  farms 
with  all  their  equipment  of  buildings  and  machinery, 
the  mines,  quarries  and  oil  weUs,  the  thousands  of  fac- 
tories filled  with  machinery  of  all  sorts,  the  250,000 
miles  of  railway,  and  the  thousands  of  steamships  and 
sailing  vessels,  all  the  buildings  in  towns  and  cities  which 
are  used  for  productive  purposes,  the  money  by  which 
exchanges  are  effected,  and  finally  every  kind  of  raw 
material  from  ore,  logs  and  wool  to  pig  iron,  planed 
lumber  and  cloth. 

44.  The  service  of  capital  in  production. — The  service 
of  capital  in  production  is  to  enable  men  to  utilize  the 
forces  and  properties  of  nature,  to  make  nature  ac- 

1—5 


66  ECONOMICS 

complish  for  them  what  they  could  not  accomplish  for 
themselves.  To  this  end,  they  must,  as  it  were,  capture 
these  forces  and  compel  them  to  do  their  bidding. 

A  peasant  requires  drinking  water.  The  spring  is  some  dis- 
tance from  his  house.  There  are  various  ways  in  which  he  may 
supply  his  daily  wants.  First,  he  may  go  to  the  spring  each 
time  he  is  thirsty,  and  drink  out  of  his  hollowed  hand.  This  is 
the  most  direct  way ;  satisfaction  follows  immediately  on  exertion. 
But  it  is  an  inconvenient  way,  for  our  peasant  has  to  take  his 
way  to  the  spring  as  often  as  he  is  thirsty.  And  it  is  an  in- 
sufficient way,  for  he  can  never  collect  and  store  any  great  quan- 
tity such  as  he  requires  for  various  other  purposes.  Second, 
he  may  take  a  log  of  wood,  hollow  it  out  into  a  kind  of  pail, 
and  carry  his  day's  supply  from  the  spring  to  his  cottage.  The 
advantage  is  obvious,  but  it  necessitates  a  roundabout  way  of 
considerable  length.  The  man  must  spend  perhaps,  a  day  in 
cutting  out  the  pail ;  before  doing  so  he  must  have  felled  a  tree 
in  the  forest ;  to  do  this  again,  he  must  have  an  axe,  and  so  on. 
But  there  is  still  a  third  way,  instead  of  felling  one  tree  he  fells 
a  number  of  trees,  splits  and  hollows  them,  lays  them  end  for 
end,  and  so  constructs  a  runnel  or  rhone  which  brings  a  full 
head  of  water  to  his  cottage.  Here,  obviously,  between  the  ex- 
penditure of  the  labor  and  the  obtaining  of  the  water,  we  have 
a  very  roundabout  way,  but,  then  the  result  is  ever  so  much 
greater.  Our  peasant  need  no  longer  take  his  weary  way  from 
the  house  to  the  well  with  the  heavy  pail  on  his  shoulder,  and 
yet  he  has  a  constant  and  full  supply  of  the  freshest  water  at  his 
very  door. 

Another  example.  I  require  stone  for  building  a  house. 
There  is  a  rich  vein  of  excellent  sandstone  in  a  neighboring  hill. 
How  is  it  to  be  got  at.'*  First,  I  may  work  the  loose  stone  back 
and  forth  with  my  bare  fingers  and  break  off  what  can  be  broken 
off.  This  is  the  most  direct,  but  also  the  least  productive  way. 
Second,  I  may  take  a  piece  of  iron,  make  a  hammer  and  chisel 
out  of  it,  and  use  them  on  the  hard  stone — a  roundabout  way 
which,  of  course,  leads  to  a  very  much  better  result  than  the 


CAPITAL  e? 

former.  Third  method — having  a  hammer  and  chisel  I  use 
them  to  drill  a  hole  in  the  rock ;  next  I  turn  my  attention  to  pro- 
ducing charcoal,  sulphur  and  nitre,  by  mixing  them  in  a  pow- 
der, then  I  pour  the  powder  into  the  hole,  and  the  explosion 
that  follows  splits  the  stone  into  convenient  pieces — still  more 
of  a  roundabout  way,  but  one  which,  as  experience  shows,  is  as 
much  superior  to  the  second  way  in  result  as  the  second  was  to 
the  first.^ 

These  simple  illustrations  show  the  nature  of  the 
service  which  capital  performs  in  industry.  It  places 
the  forces  of  nature  and  the  properties  of  matter  at  the 
service  of  man.  In  the  example  first  given,  the  im- 
penetrability of  wood  to  water  was  utilized,  and  also  the 
force  of  gravitation.  The  peasant  by  making  his  bucket 
and  constructing  his  trough  captured,  as  it  were,  this 
property  and  this  force  and  compelled  them  to  serve 
him.  In  the  second  illustration,  the  hardness  of  iron  was 
utilized  and  also  the  explosive  force  of  powder.  These 
properties  of  matter  became  the  servants  of  man.  This 
condition  of  affairs  is  characteristic  of  all  modern  capi- 
tahstic  production. 

A  steam  engine  is  built  to  utilize  the  expansive  force 
of  steam  for  the  purpose  of  transforming  and  trans- 
porting conmiodities.  This  power  is  transmitted  by 
means  of  shafting,  pulley  wheels  and  belts  to  a  machine 
tool,  such  as  a  planer.  In  this  machine,  the  hardness  of 
steel  in  the  cutting  tool  is  combined  with  the  power 
of  steam  to  shape  and  plane  cast  iron  as  easily  as  a  car- 
penter planes  a  soft  pine  board.  Here  then  is  another 
case  of  harnessing  natural  forces  to  do  work  which  man 
could  not  do  for  himself. 

45.  Capitalistic  production  is  indirect. — Capitalistic 
production  is  indirect  or  roundabout.     Its  efficiency  in- 

1  B6hm-Bawerk,  "  Positive  Theory  of  Capital,"  pp.  18-19. 


68  ECONOMICS 

creases  with  its  indirection.  A  savage  is  hungry.  He 
repairs  to  the  shore  and  gathers  shellfish.  That  is  direct 
production.  He  satisfies  his  immediate  wants.  An- 
other man,  higher  in  the  scale  of  intelligence,  collects 
by  hard  labor  enough  fish  to  give  him  subsistence  for 
some  days.  This  time  he  employs  in  making  a  canoe 
and  weaving  a  net.  With  these  appliances,  he  is  able 
with  comparatively  little  effort,  not  merely  to  supply 
his  own  wants  for  food,  but  to  obtain  a  large  surplus  of 
fish  which  he  may  exchange  for  skins  or  weapons  which 
he  desires.  The  first  man  employed  the  direct  method 
of  production,  the  second,  the  indirect.  The  first  went 
to  the  shore  and  satisfied  his  hunger ;  the  second  engaged 
in  a  totally  distinct  set  of  operations,  apparently  dis- 
connected with  fish  or  fishing,  with  the  result  that  he 
became  a  far  better  fisherman  than  his  more  simple- 
minded  fellow. 

The  superiority  of  capitalistic  over  direct  production  and 
the  reasons  for  it  will  appear  clearly  from  a  few  illustrations. 
One  of  the  most  urgent  needs  of  a  pioneer  In  a  new  country  is 
for  fresh  water.  Having  found  a  spring  he  may  gratify  this 
need  by  scooping  up  the  water  with  his  hands.  This  will  be 
direct  production.  Or  he  may  make  a  cup  In  which  he  can 
dip  up,  by  stooping  once,  all  of  the  water  he  can  drink.  Such 
a  cup  will  be  a  capital  good  and  the  process  mIII  be  capitalistic 
production.  It  will  multiply  largely  the  return  resulting  from 
the  effort  of  stooping.  Or  he  may  fashion  a  larger  vessel  in 
addition  to  his  cup  with  which  he  can  dip  up  at  one  time  all 
of  the  water  he  requires  for  a  whole  day.  This  will  be  more 
highly  capitalistic  production.  Or,  finally.  If  the  spring  hap- 
pens to  be  at  a  higher  level  than  his  cabin,  he  may  construct  a 
trough  of  hollowed  logs  capable  of  conducting  the  water  from 
its  source  to  his  very  door.  This  will  be  much  more  highly  capi- 
talistic production  than  either  of  the  other  processes,  and  its 
return  will  be  correspondingly  larger.     The  force  of  gravity 


CAPITAL  69 

will  now  relieve  him  entirely  of  the  task  of  carrying  the  water, 
and  all  that  he  will  need  to  do  to  secure  an  abundant  supply  will 
be  to  keep  his  trough  in  repair.^ 

46.  Illustrations  of  indirect  production — Fishing. — 
To  return  to  the  fishermen.  Suppose  a  civilized  man 
wishes  to  fish  on  a  commercial  scale.  He  has  built  for 
him  a  steam  vessel,  with  an  elaborate  equipment  of  nets 
and  seines.  He  lays  in  a  store  of  provisions,  enough 
to  last  a  month  or  more.  He  provides  facilities  for 
curing,  salting  and  packing  the  fish  taken.  He  hires  a 
crew.  Then  he  is  ready  for  fishing.  The  first  fisher- 
man requires  an  hour;  the  result  is  a  few  poor  shell- 
fish. The  second  requires  perhaps  two  weeks,  and  the 
result  is  a  boatload,  perhaps  150  pounds,  of  the  fish  that 
can  be  taken  close  off  shore.  The  third  requires  six 
months,  besides  a  number  of  extended  series  of  opera- 
tions in  constructing  the  machinery  with  the  aid  of 
which  the  vessel  is  built  and  equipped.  The  result  is  a 
hundred  tons  of  deep  sea  fish.  At  each  step,  the  pro- 
ductive process  grows  more  indirect,  more  roundabout 
and  circuitous,  but  at  the  same  time  more  efficient. 

47.  An  illustration  of  capitalistic  production — in- 
crease of  flour  trade  to  China. — Consider  finally  an  ex- 
treme illustration  of  the  law  whose  operation  we  are 
here  considering.  Let  us  assume  that  the  president  of 
the  Great  Northern  Railway  desires  to  increase  the 
sale  of  American  flour  in  China.  To  this  end,  he  has 
first  to  extend  his  lines  into  Manitoba  to  bring  down  to 
Minneapolis  the  wheat  of  the  Red  River  Valley.  He 
places  a  large  order  for  rails  with  the  Carnegie  Steel 
Company  of  Pittsburgh,  another  order  for  locomotives 
with  the  Baldwin  Locomotive  Works  of  Philadelphia, 
and  an  order  for  box  cars  with  the  American  Car  and 

1  H.  R.  Seager,  "Economics:     Briefer  Course,"  p.  79. 


70  ECONOMICS 

Foundry  Company.  He  also  orders  built  two  steam- 
ships specially  designed  for  this  trade. 

This  succession  of  orders  stimulates  activity  in  the 
iron  and  steel  trade.  An  enormous  quantity  of  iron  is 
wanted  for  these  various  purposes.  The  production  of 
iron  ore  on  the  Mesaba  Range  is  increased,  new  vessels 
are  put  into  service  to  carry  the  ore  to  Conneaut,  a  port 
at  the  foot  of  Lake  Erie,  and  new  cars  and  locomotives 
are  transferred  to  the  Pittsburgh  Bessemer  and  Lake 
Erie  Railroad  to  take  this  ore  to  Pittsburgh.  Similar 
activity  is  visible  in  the  coke  region.  Work  on  a  new 
blast  furnace  which  the  Carnegie  Company  is  building 
is  rushed  to  completion.  The  fresh  supplies  of  material 
are  quickly  converted  into  iron;  a  part  of  this  iron  is 
turned  into  steel  rails  and  shipped  north,  another  part 
into  billets,  bars,  plates  and  sheets  and  sold  to  the  car, 
locomotive  and  shipbuilding  works. 

Meanwhile,  as  the  rails  are  received  in  Manitoba,  a 
force  of  men  are  laying  the  new  line.  By  the  time  a 
hundred  miles  has  been  constructed,  the  equipment  is 
ready  and  the  service  has  been  started.  Meanwhile,  also, 
the  inmiigration  agents  of  the  Great  Northern  have  been 
busy  publishing  the  advantages  of  the  new  region  to  be 
opened.  As  a  result  of  their  efforts,  a  rush  of  popula- 
tion follows  the  railroad,  and  the  settlement  of  the 
territory  creates  a  demand  for  lumber,  live  stock,  agri- 
cultural implements,  furniture,  and  provisions,  stimu- 
lating the  activity  of  the  industries  which  produce  these 
commodities.  Within  a  year,  a  large  crop  of  wheat  is 
harvested,  carried  to  Minneapolis  and  ground  into  flour, 
which  is  then  shipped  to  Seattle  to  be  loaded  into  the  new 
vessels  which  have  by  this  time  been  completed. 
Finally,  after  two  years  of  preparation,  the  flour  which 
was  the  object  of  all  this  preparation  is  landed  in  China, 


CAPITAL  n 

its  destination  from  the  beginning.  This  illustration 
ghows  the  essential  character  of  the  capitalistic  system 
of  production  as  being  roundabout  and  indirect.  In 
order  to  produce  fifty  thousand  tons  of  flour  a  long  series 
of  preliminary  operations  were  necessary,  most  of  which 
were  indirectly  related  to  flour  production,  but  which  all 
contributed  in  one  way  and  another  to  this  result.  With 
the  resources  for  wheat  production  existing  before  the 
extension  of  the  railroad  was  inaugurated,  the  new  de- 
mand for  flour  could  not  have  been  supplied.  If  the 
demand  had  been  only  for  a  few  thousand  barrels,  no 
increase  in  equipment  would  have  been  needed.  To  fill 
a  large  order,  however,  the  circuitous  path  which  we 
have  traced  must  be  followed,  in  order  to  make  a  new 
draft  upon  the  great  reservoir  of  productive  power  in  the 
northwest. 

48.  Saving  defined. — We  may  define  the  process  of 
the  creation  of  capital  as  saving.  As  commonly  under- 
stood, saving  consists  in  putting  away  money  in  a  bank. 
In  fact,  however,  this  deposit  of  money  is  only  a  means 
to  the  end  of  the  production  of  capital  goods.  Ignor- 
ing, as  we  may,  at  this  stage  of  our  discussion,  all  con- 
sideration of  the  function  of  the  savings  institution  in 
promoting  the  production  of  capital  goods,  we  may 
point  out  that  since  the  object  of  saving  is  to  obtain  an 
income,  this  project  can  be  achieved  only  by  increasing 
the  production  of  consumable  goods,  which  in  turn,  as 
we  have  seen,  necessitates  the  production  of  capital 
goods.  This  production  of  capital  goods  conserves  or 
saves  energy  in  a  form  in  which  it  becomes  available  for 
the  future  satisfaction  of  human  wants.  We  repeat, 
therefore,  that  saving  is  the  production  of  capital  or  in- 
termediate goods. 

49.  Illustration  of  saving. — When  a  railroad  increases 


72  ECONOMICS 

the  number  of  its  cars,  locomotives  or  miles  of  track,  it  is 
saving  in  the  sense  in  which  we  are  here  using  the  term. 
This  often  involves  large  amounts  in  a  single  year.  The 
amount  of  saving  thus  done  depends  largely  on  the  finan- 
cial condition  of  the  country.  In  years  of  prosperity, 
railroads  will  extend  their  lines  and  add  new  cars.  In 
years  of  depression,  these  expenses  are  immediately  cur- 
tailed. However,  a  railroad  in  a  healthy  condition  in 
normal  times  makes  steady  additions  from  year  to  year 
to  its  physical  equipment.  This  is  well  illustrated  in  the 
accompanying  table  which  shows  the  increase  made  in  the 
number  of  locomotives,  cars  and  trackage  of  the  Penn- 
sylvania Railroad  system  during  the  period  1904-1912. 

1904  1910  1912 

Number  of  locomotives 5,327  6,860  7,101 

Number  of  passenger  cars 5,181  5,831  6,697 

Number  of  freight  cars 210,970  263,039  267,594 

Miles  of  tracks 21,157  24,416  25,494 

50.  Necessity  of  saving. — A  large  amount  of  saving 
is  necessitated,  not  merely  by  the  destruction  of  materials 
in  production,  but  by  the  deterioration  of  industrial 
plants,  the  exhaustion  of  soils  and  the  destruction  of 
forests.  The  productive  equipment  of  society  is  con- 
stantly wearing  out,  and  this  must  be  replaced  if  the 
output  of  consumable  goods,  the  end  and  aim  of  all 
productive  activity,  is  not  to  be  diminished. 

51.  Maintenance  of  plant  saving. — One  of  the  most 
interesting  forms  of  saving  is  that  involved  in  the 
maintenance  of  capital.  This  too  is  well  illustrated  in 
the  history  of  every  railroad.  Two  of  the  most  im- 
portant expense  accounts  on  the  books  of  all  railroads 
are:  (1)  Maintenance  of  way  and  structure.  (2) 
Maintenance  of  equipment.  The  principle  underlying 
maintenance  is  that  the  property  should  be  in  as  good 


CAPITAL  78 

pnysical  condition  at  the  end  of  the  year  as  it  was  at 
the  beginning.  A  machine  or  a  factory  building  may 
have  a  definite  term  of  usefulness.  This  fact  is  recog- 
nized in  the  depreciation  account  which  the  owner  carries 
on  his  books.  A  railway,  on  the  other  hand,  is  prac- 
tically a  permanent  property  upon  which  it  is  not 
customary  or  practicable  to  compute  depreciation.  A 
railway  track  in  all  its  parts,  is  non-removable.  It  is 
a  permanent  structure  and  as  such  must  be  maintained 
in  the  highest  state  of  efficiency  in  order  to  be  effective. 
This  is  such  a  paramount  necessity,  that  any  railway 
company  which  does  not  spend  generous  sums  upon 
maintenance  of  the  permanent  roadway,  and  upon  im- 
provements thereof,  will  soon  find  the  operation  of  the 
road  unduly  expensive  and  dangerous. 

First,  let  us  look  at  the  roadway  itself.  From  the 
very  first  day  that  operation  begins  there  must  be  spent 
large  sums  for  strengthening  the  roadbed.  Heavy 
rains,  melting  snow  and  sliding  banks  necessitate  large 
expenditures  for  additional  culverts,  for  larger  drains, 
for  ditching  and  for  stone  retaining  walls,  while  the 
expense  of  heavy  rock  ballasting  appears  to  be  almost 
without  end.  There  is  always  something  to  be  done  in 
straightening  out  curves,  reducing  grades,  filling  in  soft 
places,  draining  the  right  of  way  and  ofttimes  part  of 
the  surrounding  country,  all  of  which  must  be  paid  for 
out  of  the  earnings. 

Then  the  bridges  and  trestles,  hastily  built  in  con- 
struction days,  require  strengthening  with  additional 
timbers  as  well  as  new  sills,  caps,  posts,  and  stringers 
for  replacement  of  rotten  or  defective  materials.  Even 
if  a  wooden  bridge  is  entirely  rebuilt,  the  cost  must  be 
paid  out  of  the  earnings.  In  five  years  or  less,  the  ties, 
especially  those  that  lie  low  in  ground,  are  found  to  be 


74  ECONOMICS 

rotten  or  cut  with  the  chafing  of  the  rails,  and  have  to 
be  replaced  a  few  at  a  time.  It  is  not  long  before  the 
rails  on  the  curves  and  gradients  show  wear  and  have  to 
be  renewed,  the  old  rails  being  retired  to  service  on  side 
tracks.  Switches,  frogs,  track  fastenings,  angle  bars 
and  all  the  rest,  do  not  last  long  and  must  be  gradually 
replaced.  The  cost  of  all  these  renewals  and  replace- 
ments must  be  paid  for  out  of  the  current  year's  earnings 
and  charged  to  "maintenance  of  permanent  way." 

52.  Illustrations  of  maintenance, — The  problem  of 
the  maintenance  of  capital  in  the  industrial  world  af- 
fords  as  many  complex  phases  as  those  just  noted  in  the 
management  of  a  railroad.  Not  only  must  the  indus- 
trial plant  be  maintained  in  good  condition,  but  it  must» 
from  time  to  time,  be  replaced.  There  is  a  limit  to  the 
economy  of  repairs.  In  time  a  new  engine,  a  new  boiler, 
becomes  necessary.  This  gradual  deterioration  of  the 
industrial  plant  we  know  as  depreciation.  The  fact 
that  business  realizes  this  fact  is  seen  in  the  depreciation 
accounts  that  they  carry  on  their  books.  A  man  installs 
a  new  machine  costing  $10,000;  he  knows,  from  ex- 
perience, that  the  average  life  of  such  a  machine  is  ten 
years;  he  further  knows  that  it  would  be  bad  business, 
not  to  say  illogical,  to  carry  the  value  of  that  machine 
on  his  books  during  the  ten  years  at  $10,000.  Common 
sense  tells  him  that  at  the  end  of  five  years  it  will  have 
fallen  considerably  in  value.  He,  therefore,  writes  off 
in  his  books  10  per  cent  of  the  value  each  year,  so  that 
at  the  tenth  year  when  his  machine  is  ready  for  the  junk 
pile,  he  deducts  his  last  10  per  cent.  His  books,  under 
these  conditions,  have  represented  the  true  status  of  his 
business  at  any  particular  moment.  Similarly  business 
men  write  off  from  2;^  per  cent  to  5  per  cent  each  year 
for  the  depreciation  of  their  factory  buildings,  as  the 


CAPITAL  75 

average  life  of  these  buildings  is  from  twenty  to  forty 
years.  To  estimate  accurately  the  rate  of  depreciation 
on  many  forms  of  capital  is  a  difficult  task,  often  requir- 
ing the  expert  knowledge  of  an  accountant.  A  good 
illustration  is  found  in  the  case  of  a  manufacturer  who 
uses  steam  as  the  source  of  power. 

While  the  hfe  of  a  boiler  very  largely  depends  upon 
the  care  and  treatment  it  gets,  the  opportunity  for  re- 
pairs that  is  possible,  the  hours  it  is  called  upon  to  work, 
and  the  load  it  has  to  carry,  much  also  depends  upon 
the  class  of  water  with  which  it  is  fed.  In  a  paper  on 
the  subject  of  "Depreciation  of  Water  Works  Plants," 
Mr.  John  W.  Alvord,  consulting  engineer,  of  Chicago, 
gives  an  interesting  table  showing  the  history  of  thirty- 
two  horizontal  tubular  boilers  used  in  water-pumping 
stations  in  Illinois,  Iowa  and  Michigan.  The  active  life 
of  these  thirty -two  boilers  was  found  to  have  varied  from 
six  years  for  two  boilers  at  Sterling,  Illinois,  where 
artesian  water  was  used,  to  twenty-three  years  for  two 
boilers  at  Oskaloosa,  Iowa,  where  river  water  was  used, 
the  latter  boilers  being  still  in  service.  The  average  life 
of  this  group  of  thirty-two  boilers  was  fifteen  years. 
This  data  would  seem  to  indicate  that  the  rate  of  depre- 
ciation charged  on  the  diminishing  value  of  the  boilers 
should  be  20  per  cent  where  artesian  water  is  used,  10 
per  cent  where  lake  water  is  used,  and  5  per  cent  where 
soft  river  Water  is  used,  other  factors  being  equal. 
These  rates  may  be  subject  to  revision  in  view  of  the 
success  with  which  boiler  compounds  are  used ;  the  duties 
the  boilers  are  called  upon  to  perform,  and  finally, 
whether  they  are  running  easy,  with  ample  time  for  re- 
pairs and  cleaning,  or  whether  they  are  crowded  beyond 
their  proper  capacity.  In  some  plants  there  is  ample 
room  in  the  boiler  house  and  abundant  capacity  is  pro- 


76  ECONOMICS 

vided,  the  load  is  light,  the  rest  hours  plenty,  and  the 
opportunities  for  proper  repairs  are  ample,  while  the 
care  given  is  of  the  best;  in  such  berths  the  boilers  ad- 
vance gracefully  to  old  age  and  are  often  pensioned  by 
being  kept  in  reserve  for  emergencies  or  breakdowns. 
Here  the  life  of  active  service  is  hkely  to  be  thirty  years, 
or,  in  rare  cases,  even  more.  In  other  plants,  where  the 
conditions  are  reversed,  where  the  exigencies  of  the  bus- 
iness press  sorely  upon  the  boiler,  necessitating  the  max- 
imum horse  power  capacity  all  the  time;  where  night 
work  and  Sunday  work  preclude  the  possibility  of 
proper  repairs  being  made,  the  life  of  a  boiler  of  exactly 
the  same  make  may  be  a  third  or  even  a  quarter  the  time 
of  where  the  conditions  are  all  favorable. 

The  phenomenon  of  depreciation  is  universal  in  the 
business  world.  A  man  who  would  be  successful  dares 
not  overlook  it.  To  replace  the  loss  incurred  through 
depreciation,  a  large  amount  of  saving  is  necessary. 

53.  Meaning  of  the  consumption  of  capital. — All  cap- 
ital, although  saved,  is  consumed  in  the  processes  of  pro- 
duction. By  the  consumption  of  capital  we  mean  that  it 
is  used  up  and  destroyed.  Everything  which  is  produced 
is  consumed,  and  in  this  way,  even  the  most  permanent 
forms  of  capital  are  destroyed.  Furthermore,  a  large 
number  of  the  materials  of  production  are  entirely  de- 
stroyed in  the  processes  of  manufacture,  so  far  as 
their  original  form  is  concerned.  For  example,  coal 
under  a  factory  boiler  is  burned  up  and  destroyed. 
In  addition  to  the  consumption  of  capital  there  is 
the  most  familiar  form  in  the  consumption  of  fin- 
ished goods,  the  consumption  of  food  and  clothing 
and  other  necessities  by  mankind.  The  destruction  of 
these  consumable  goods  we  must  classify  as  either  pro- 
ductive or  unproductive  consumption. 


CAPITAL  T7 

54.  Productive  and  unproductive  consumption. — 
Productive  consumption  of  consumable  goods  results  in 
either  maintaining  or  increasing  the  productive  equip- 
ment of  society.  All  consumption  of  commodities  by 
the  world's  workers,  i.  e.,  by  every  man,  woman  and 
child  who  is  employed  in  industry,  is  productive  con- 
sumption. 

All  luxurious  and  extravagant  consumption  is  un- 
productive consumption.  Illustrations  of  unproductive 
consumption  are  furnished  by  the  social  dependents,  de- 
fectives and  delinquents,  paupers,  criminals  and  lunatics, 
whose  support  is  a  public  burden.  The  expense  of  war 
is  unproductive  consumption.  This  last  statement  may 
be  qualified.  While  the  expense  of  war  may  be  un- 
productive consumption,  money  spent  on  fortifications 
and  navies  should  rather  be  looked  upon  as  insurance. 
It  is  not  strictly  logical  to  class  the  purchase  of  cham- 
pagne and  similar  luxuries  with  the  buying  of  a  man-of- 
war.  Military  and  naval  expenditure  is  rather  pay- 
ment of  insurance  than  unproductive  consumption.  In 
the  recent  naval  discussion  in  Great  Britain  the  signifi- 
cant statement  was  made  that  the  cost  of  four  days  of 
war  would  build  one  battle  ship.  In  general,  however, 
all  consumption  may  be  classed  as  unproductive  which 
results  in  reducing  the  wealth  or  increasing  the  pro- 
tective equipment  of  society. 

The  concrete  forms  which  productive  capital  may  assume  are 
as  follows : 

1.  Productive  improvements  upon  land,  such  as  fences,  drains, 
fertilizers,  etc.  The  land  in  itself  is  a  gift  of  nature,  not  a 
product  of  human  industry.  It  is  not  created  by  man  to  serve 
as  an  aid  to  indirect  production.  Productive  improvements  may 
be  counted  as  capital  so  long  as  they  can  be  distinguished  from 


78  ECONOMICS 

the  land  itself.  Fertilizers  or  drains  become,  in  a  shorter  or 
longer  time,  indistinguishably  merged  with  the  land. 

2.  Buildings,  such  as  factories  or  workshops,  devoted  to  the 
purpose  of  aiding  in  the  process  of  indirect  production. 

S.  Means  of  transportation,  such  as  roads,  canals,  and  rail- 
ways. 

4.  Raw  materials,  such  as  iron,  wood,  cotton,  silk,  and  wool, 
which  are  consumed  in  the  act  of  production,  but  reappear  in 
the  product. 

5.  Auxiliary  materials,  such  as  coal,  lubricating  oils,  and 
bleaching  materials,  which  aid  the  productive  process,  but  do 
not  reappear  in  the  product. 

6.  Tools  and  machines.  Within  the  last  century  these  have 
become  the  most  important  form  of  capital,  in  many  respects. 

7.  Domesticated  animals  used  in  production.  Breeds  of  do- 
mestic animals  have  been  so  improved  by  scientific  breeding  that 
they  are  distinctly  a  product  of  human  industry. 

8.  Money,  weights  and  measures,  and  scales  and  balances. 
We  shall  soon  see  that  these  objects  are  a  most  important  means 
of  carrying  on  capitalistic  or  roundabout  production. 

9.  Commercial  stocks  of  finished  products  or  consumers' 
goods.  These  do  not  include  consumers'  goods  in  the  hands 
of  the  final  consumers.  Strictly  speaking,  finished  products 
should  not  be  called  consumers'  goods  until  they  reach  the  final 
consumers.  Capitalistic  production  would  be  impossible  if  capi- 
talist-producers did  not  produce  goods  for  distant  markets  and 
for  a  future  season's  consumption.  Wheat  must  be  produced 
in  one  season,  and  a  sufficient  stock  must  be  carried  over  to  last 
until  the  next  harvest.  Spring  dress  goods  must  be  produced 
several  months  in  advance  of  the  season  when  they  are  demanded. 
Agricultural  implements,  made  in  America  and  exported  to 
Australia,  may  be  several  months  in  reaching  the  final  consumer. 
Merchants  perform  the  important  social  function  of  carrying 
all  such  commercial  stocks  of  goods  as  require  weeks  or  months 
to  pass  from  producer  to  consumer.  Commercial  or  mercantile 
stocks  of  finished  products  are  an  indispensable  aid  to  the  process 
of  capitalistic  production,  and  fall  under  our  definition  of  capi- 


CAPITAL  79 

tal.  They  are  really  producers'  and  not  consumers*  goods. 
They  are  materials  to  which  time  and  place  utilities  are  being 
added  by  the  merchants  who  forward  them  to  consumers. 

10.  Capital  used  by  persons  who  render  personal  services. 
The  instruments  of  the  surgeon,  and  the  books  and  scientific 
apparatus  of  the  student  are  examples.  A  fuller  classification 
would  include  at  least  the  following  objects  under  this  form  of 
capital:  (a)  all  scientific  and  professional  instruments  and  ap- 
paratus; (b)  churches,  theaters,  public  halls,  and  all  buildings 
necessary  for  rendering  personal  services;  (c)  courthouses, 
jails,  forts,  warships,  government  buildings,  and  all  the  appli- 
ances necessary  for  public  functions.  All  these  are  means  of 
producing  indirectly  services  which  could  not  be  rendered  directly 
without  such  appliances.^ 

James  J.  Hill,  the  great  railroad  builder,  had  in  mind 
the  relative  scarcity  of  agricultural  capital  in  the  United 
States  when  he  spoke  as  follows  before  the  American 
Bankers'  Association  at  Chicago  in  September,  1909; 

The  consumers  of  bread  throughout  the  world  increase  by 
probably  from  four  to  five  millions  every  year.  In  our  own 
country  we  shall  require  from  thirteen  to  fifteen  million  bushels 
more  annually  for  seed  and  home  consumption.  The  domestic 
supply  cannot  be  maintained  by  present  methods.  Not  only 
is  the  cultivation  of  the  soil  being  neglected,  but  it  is  also  no- 
toriously ineff"ective. 

All  this  has  come  about  notwithstanding  economic  changes 
favorable  to  the  occupation  of  the  farm. 

Practically  only  a  few  months  lie  between  a  universal  cessa- 
tion of  production  and  the  destruction  of  the  human  race  by 
starvation.  The  marvelous  diversity  of  modern  industry  and 
its  products  blind  us  to  the  bare  simplicity  of  the  situation. 
Those  who,  like  you,  are  main  factors  in  supplying  to  industry 
the  means  to  carry  it  on,  who  open  up  the  main  and  lateral  chan- 
nels through  which  the  fertilizing  stream  of  capital  may  be 

1  C.  J.  Bullock,  "  Introduction  to  the  Study  of  Economics,"  pp.  133^. 


80  ECONOMICS 

turned  upon  the  otherwise  barren  field  of  labor,  should  be  al- 
ways mindful  of  the  first  great  source  and  storehouse  of  national 
wealth,  and  the  most  sensitive  whenever  it  is  depleted  or  endan- 
gered. 

55.  What  constitutes  economic  usefulness. — The  cor- 
ollary to  this  proposition  is  that  the  man  of  the  greatest 
economic  use  in  the  world  is  the  man  who  devotes  the 
larger  portion  of  his  income  to  production,  or  who  saves 
the  larger  part  of  his  income.  The  spendthrift,  the  man 
who  dissipates  his  patrimony  and  who  wastes  his  sub- 
stance in  extravagance  and  luxury,  although  he  may  put 
a  large  amount  of  money  into  circulation,  is,  nevertheless, 
an  enemy  to  society,  because  he  is  wasting  its  resources. 
The  man  who  uses  his  income  to  build  factories,  rail- 
roads, to  open  mines,  to  clear  and  drain  land,  not  only 
increases  his  own  wealth,  but  also  the  wealth  of  society; 
while,  on  the  other  hand,  the  man  who  puts  his  income 
into  fine  houses  and  yachts,  into  the  establishment  and 
maintenance  of  large  retinues  of  servants,  and  the  pur- 
chase of  enormously  costly  tapestries,  rugs,  rare  books 
and  pictures,  all  destined  for  his  own  enjoyment,  is  not 
only  reducing  his  own  wealth  below  the  figure  at  which  it 
would  stand,  but  is  also  impairing  the  wealth  of  society. 
The  man  serves  his  fellowmen  best,  who  most  rapidly 
increases  his  wealth,  in  other  words,  by  using  it  to  pro- 
duce capital  goods  in  the  multitude  of  which  the  wealth 
of  society  consists. 


CHAPTER  VIII 

DIVISION  OF  LABOR 

56.  The  meaning  of  the  division  of  labor. — ^We  have 
now  to  consider  the  method  by  which  the  three  factors 
in  production — natural  agents,  labor  and  capital — are 
combined  in  the  productive  process.  Singly,  no  one  of 
these  factors  is  of  any  account  in  production ;  united,  they 
can  accomplish  almost  anything.  This  cooperation  is 
accomplished  by  means  of  the  division  of  labor.  By  the 
division  of  labor  we  mean  the  separation  of  the  employ- 
ments of  natural  agents,  labor  and  capital,  so  that  each 
producer  has  only  a  single  thing  to  do,  and  so  that  each 
resource  and  each  kind  of  machinery  is  utilized  in  a  par- 
ticular way. 

We  can  best  understand  the  division  of  labor,  a  broad 
term  denoting  the  specialization  of  the  employments  of 
the  three  factors  of  production,  by  a  description  of  the 
operations  which  go  on  in  a  typical  manufacturing  plant 
— a  woolen  mill. 

57.  Illustration  of  the  division  of  labor  by  the  opera- 
tions of  a  woolen  mill. — The  operation  of  manufacturing 
woolen  cloth  is  subdivided  as  follows :  ( 1 )  Sorting  the 
wool  to  separate  the  different  grades  which  are  used  for 
different  fabrics;  (2)  picking,  which  is  performed  by 
running  the  wool  through  a  machine  called  a  picker, 
which  tears  it  apart,  takes  out  burrs  and  other  such  mat- 
ter which  was  not  removed  by  washing,  and  separates 
the  fibres  in  such  a  way  that  they  are  ready  for  the  next 
operation;  (3)  scouring,  to  take  all  the  grease  and  dirt 

1-6  81 


82  ECONOMICS 

out  of  the  wool  and  leaving  it  white;  (4)  dyeing,  which  is 
accomplished  by  boiling  the  wool  in  large  vats  filled 
with  dye  solution;    (5)    carding,  the  object  of  which 
is  to  further  separate  the  fibres,  to  mix  the  colors,  and 
to  get  the  wool  in  a  condition  to  be  spun.     It  is  accom- 
plished by  conveying  the  wool  between  cylinders  covered 
with  wire  cloth  which  pulls  the  fibres  apart,  thoroughly 
mixes  them,  and  lays  them  side  by  side.      The  next 
operation  is  (6)  spinning,  which  is  a  combined  process 
of  drawing  out  and  twisting.     The  object  of  spinning 
is  to  reduce  the  size  of  the  strand  and  to  make  the  wool 
ready  for  the  loom.     After  the  yarn  is  reduced  to  a 
proper  size,  it  is  ready  for  weaving.     (7)   Weaving  con- 
sists in  uniting  the  threads  in  such  a  way  as  to  form 
a  fabric.     This  is  done  by  interlacing  one  set  of  threads 
called  the  warp  with  another  set  called  the  weft.     The 
warp  threads  are  drawn  slowly  through  the  loom  in  one 
way,  and  a  shuttle,  called  a  bobbin,  containing  the  weft 
threads  goes  across  and  back  in  the  opposite  way.     This 
interlaces  the  threads  and  forms  the  cloth.     (8)    The 
cloth  is  then  taken  to  the  finishing  room,  where  it  is 
soaped  and  run  between  rollers  in  order  to  shrink  it;  it 
is  next  run  through  a  napper  or  gig,  a  cylinder  studded 
with  teazels  which  raises  the  nap  on  the  face  of  the  cloth. 
The  long  threads  of  this  nap  are  next  sheared,  the  cloth 
is  then  dried  and  run  through  a  steam  brush,  examined 
a  second  time  and  run  through  an  ironing  machine. 
The  final  stage  in  finishing  is  to  re-examine  the  cloth, 
measure,  fold,  weigh,  wrap  and  ship  it. 

Here  are  eight  different  stages  in  the  manufacture 
of  woolen  cloth,  and  each  stage,  as  we  have  seen,  is  mi- 
nutely subdivided  into  minor  operations.  Each  opera- 
tion, and  in  some  large  mills  there  are  hundreds  of 
separate  processes  going  on  at  the  same  time,  is  in  charge 


DIVISION  OF  LABOR  88 

of  a  foreman  or  boss  who  devotes  his  entire  attention  to 
the  particular  work  over  which  he  is  placed.  Under 
the  bosses  are  workmen  and  laborers,  each  one  exclu- 
sively occupied  in  doing  some  one  particular  thing.  For 
example,  before  the  yarn  is  ready  to  be  woven,  the  warp 
threads  must  be  wound  upon  a  beam  and  the  ends  of  the 
threads  inserted  in  long  needles  which  form  what  is 
known  as  the  harness  of  the  loom.  In  a  large  mill  sev- 
eral men  will  be  occupied  in  doing  nothing  all  day  long 
save  inserting  the  warp  threads  in  the  eyes  of  the  harness 
needle.  Similar  minute  subdivisions  of  employment 
are  met  with  in  every  department  of  this  mill. 

Adam  Smith  in  his  "Wealth  of  Nations"  presents  an 
illustration  of  the  advantages  of  the  division  of  labor 
which  has  become  a  classic : 

To  take  an  example,  therefore,  from  a  very  trifling  manu- 
facture; but  one  in  which  the  division  of  labor  has  been  very 
often  taken  notice  of,  the  trade  of  the  pin-maker ;  a  workman  not 
educated  to  this  business  (which  the  division  of  labor  has  ren- 
dered a  distinct  trade),  nor  acquainted  with  the  use  of  the  ma- 
chinery employed  in  it  (to  the  invention  of  which  the  same 
division  of  labor  has  probably  given  occasion),  could  scarce, 
perhaps,  with  his  utmost  industry,  make  one  pin  a  day,  and 
certainly  could  not  make  twenty.  But  in  the  way  in  which  this 
business  is  now  carried  on,  not  only  the  whole  work  is  a  pecu- 
liar trade,  but  it  is  divided  into  a  number  of  branches,  of  which 
the  greater  part  are  likewise  peculiar  trades.  One  man  draws 
out  the  wire,  another  straights  it,  a  third  cuts  it,  a  fourth 
points  it,  a  fifth  grinds  it  at  the  top  for  receiving  the  head ;  to 
make  head  requires  two  or  three  distinct  operations ;  to  put  it 
on  is  a  peculiar  business ;  to  whiten  the  pins  is  another ;  it  is 
even  a  trade  by  itself  to  put  them  into  the  paper;  and  the  im- 
portant business  of  making  a  pin  is,  in  this  manner,  divided  into 
about  eighteen  distinct  operations,  which,  in  some  manufactories, 
are  all  performed  by  distinct  hands,  though  in  others  the  same 


84»  ECONOMICS 

man  will  sometimes  perform  two  or  three  of  them.  I  have  seeu 
a  small  manufactory  of  this  kind  where  ten  men  only  were  em- 
ployed, and  where  some  of  them,  consequently  performed  two 
or  three  distinct  operations.  But  though  they  were  very  poor 
and  therefore  but  indifferently  accommodated  with  the  necessary 
machinery,  they  could,  when  they  exerted  themselves,  make 
among  them  about  twelve  pounds  of  pins  a  day.  There  are  In 
a  pound  upwards  of  four  thousand  pins  of  middling  size. 
These  ten  persons,  therefore,  could  make  among  them  upwards 
of  forty-eight  thousand  pins  a  day.  Each  person,  therefore, 
making  a  tenth  part  of  forty-eight  thousand  pins,  might  be 
considered  as  making  four  thousand  eight  hundred  pins  a  day. 
But  if  they  had  all  wrought  separately  and  independently,  and 
without  any  of  them  having  been  educated  to  this  peculiar  busi- 
ness, they  certainly  could  not  each  of  them  have  made  twenty, 
perhaps  not  one  pin  a  day ;  that  is,  certainly,  not  the  two  hun- 
dred and  fortieth,  perhaps  not  the  four  thousand  eight  hun- 
dredth part  of  what  they  are  at  present  capable  of  performing, 
in  consequence  of  a  proper  division  and  combination  of  their 
different  operations. 

58.  Advantages  of  division  of  labor. — This  division  of 
labor,  which  we  have  also  defined  as  the  specialization 
of  employment,  is  the  universal  characteristic  of  modern 
industry.  In  some  form  it  has  been  met  with  almost 
from  the  beginning.  There  have  always  been  black- 
smiths, carpenters,  masons,  stone-cutters,  tailors  and 
shoemakers.  This  division  of  trades  is  familiar  to 
everyone.  It  has  remained  for  modern  production, 
however,  to  bring  together  a  large  number  of  these 
separate  trades  under  one  roof,  and  further  to  sub- 
divide them  until  each  man  has  only  a  small  division 
of  the  entire  process  under  his  charge. 

59.  Increased  efficiency  through  the  division  of  labor. 
— The  division  of  labor  greatly  increases  the  effective- 
ness of  production.     In  the  first  place,  it  increases  the 


DIVISION  OF  LABOR  85 

productive  power  of  the  individual.  By  constant  repe- 
tition of  a  certain  operation,  such  as  inserting  threads 
in  harness  needles,  this  operation,  which  is  by  no  means 
easy  to  a  beginner,  becomes  habitual  or  mechanical; 
an  industrial  habit  is  formed.  The  operative's  move- 
ments are,  therefore,  greatly  simplified.  He  makes  no 
false  motions;  his  hands  work  as  accurately  as  though 
they  were  guided  by  machinery.  Indeed,  for  all  prac- 
tical purposes,  if  fatigue  could  be  eliminated  from  the 
calculation,  he  has  become  a  machine,  and  works  with  the 
accuracy  and  certainty  of  power-driven  mechanism.  Fi- 
nally, the  specialization  of  employment  diminishes  the 
fatigue  of  the  operative.  Everyone  knows  from  obser- 
vation that  the  fatigue  of  performing  an  operation, 
which  has  been  thoroughly  learned,  is  much  less  than 
while  the  operator  is  learning  to  do  this  work.  Having, 
by  minute  specialization  and  careful  attention  to  per- 
forming a  few  operations,  correctly  learned  how  to  do 
these  things  unconsciously,  the  fatigue  of  constant  at- 
tention, which  exhausts  the  beginner,  is  largely  absent. 
A  man  can  sit  down  at  his  loom  or  at  his  bench  for  five 
hours  at  a  time  without  feeling  especially  wearied  at 
the  end  of  the  day. 

Adam  Smith  elaborates  this  point  as  follows,  in  the 
chapter  already  referred  to: 

The  great  increase  in  the  quantity  of  work,  which,  in  con- 
sequence of  the  division  of  labor,  the  same  number  of  people  are 
capable  of  performing,  is  owing  to  three  different  circum- 
stances ;  first,  to  the  increase  of  dexterity  in  every  particular 
workman ;  secondly,  to  the  saving  of  time  which  is  commonly 
lost  in  passing  from  one  species  of  work  to  another ;  and,  lastly, 
to  the  invention  of  a  great  number  of  machines  which  facilitate 
and  abridge  labor,  and  enable  one  man  to  do  the  work  of 
many. 


86  ECONOMICS 

First,  the  improvement  of  the  dexterity  of  the  workman  nec- 
essarily increases  the  quantity  of  work  he  can  perform;  and 
the  division  of  labor,  by  reducing  every  man's  labor  to  some 
one  simple  operation,  and  by  making  this  operation  the  sole 
employment  of  his  life,  necessarily  increases  very  much  the  dex- 
terity of  the  workman.  A  common  smith,  who,  though  accus- 
tomed to  handle  the  hammer,  has  never  been  used  to  make  nails, 
if  upon  some  particular  occasion  he  is  obliged  to  attempt  it, 
will  scarce,  I  am  sure,  be  able  to  make  above  two  or  three  hun- 
dred nails  in  a  day,  and  those,  too,  very  bad  ones.  A  smith, 
who  has  been  accustomed  to  make  nails,  but  whose  sole  or  prin- 
cipal business  has  not  been  that  of  a  nailer,  can  seldom  with  his 
utmost  diligence  make  more  than  eight  hundred  or  a  thousand 
nails  a  day.  I  have  seen  several  boys  under  twenty  years  of 
age  who  had  never  exercised  any  other  trade  but  that  of  mak- 
ing nails,  and  who,  when  they  exerted  themselves,  could  make, 
each  of  them,  upwards  of  two  thousand  three  hundred  nails  a 
day.  The  making  of  a  nail,  however,  is  by  no  means  one  of 
the  simplest  operations.  The  same  person  blows  the  bellows, 
stirs  or  mends  the  fire  as  there  is  occasion,  heats  the  iron,  and 
forges  every  part  of  the  nail.  In  forging  the  head,  too,  he  is 
obliged  to  change  his  tools.  The  different  operations  into  which 
the  making  of  a  pin,  or  of  a  metal  button,  is  subdivided,  are 
all  of  them  much  more  simple,  and  the  dexterity  of  the  person, 
of  whose  life  it  has  been  the  sole  business  to  perform  them,  is 
usually  much  greater.  The  rapidity  with  which  some  of  the 
operations  of  those  manufactures  are  performed,  exceeds  what 
the  human  hand  could,  by  those  who  had  never  seen  them,  be 
supposed  capable  of  acquiring. 

Secondly,  the  advantage  which  is  gained  by  saving  the  time 
commonly  lost  in  passing  from  one  sort  of  work  to  another,  is 
much  greater  than  we  should  at  first  view  be  apt  to  imagine  it. 
It  is  impossible  to  pass  very  quickly  from  one  kind  of  work 
to  another,  that  is  carried  on  in  a  different  place,  and  with 
quite  different  tools.  A  country  weaver,  who  cultivates  a  small 
farm,  must  lose  a  good  deal  of  time  in  passing  from  his  loom 
to  the  field,  and  from  the  field  to  his  loom.     When  the  two  trades 


DIVISION  OF  LABOR  87 

can  be  carried  on  in  the  same  workroom,  the  loss  of  time  is  no 
doubt  much  less.  It  is,  even  in  this  case,  however,  very  con- 
siderable. A  man  commonly  saunters  a  little  in  turning  his 
hand  from  one  sort  of  employment  to  another.  When  he  first 
begins  the  new  work  he  is  seldom  very  keen  and  hearty ;  his 
mind,  as  they  say,  does  not  go  to  it,  and  for  some  time  he 
rather  trifles  than  applies  to  good  purpose.  The  habit  of  saun- 
tering and  of  indolent  and  careless  application,  which  is  nat- 
urally, or  rather  necessarily  acquired  by  the  workman  who  is 
obliged  to  change  his  work  and  his  tools  every  half  hour,  and 
to  apply  his  hand  in  twenty  different  ways  almost  every  day  of 
his  life;  renders  him  almost  always  slothful  and  lazy,  and  in- 
capable of  any  vigorous  action  and  application  even  on  the 
most  pressing  occasions.  Independent,  therefore,  of  his  de- 
ficiency in  point  of  dexterity,  this  cause  alone  must  always  re- 
duce considerably  the  quantity  of  work  which  he  is  capable  of 
performing. 

Thirdly,  and  lastly,  everybody  must  be  sensible  how  much 
labor  is  facilitated  and  abridged  by  the  application  of  proper 
machinery.  It  is  unnecessary  to  give  any  example.  I  shall 
only  observe,  therefore,  that  the  invention  of  all  those  machines 
by  which  labor  is  so  much  facilitated  and  abridged,  seems  to 
have  been  originally  owing  to  the  division  of  labor.  Men  are 
much  more  likely  to  discover  easier  and  readier  methods  of  at- 
taining any  object,  when  the  whole  attention  of  their  minds 
is  directed  towards  that  single  object,  than  when  it  is  dissipated 
among  a  great  variety  of  things.  But  in  consequence  of  the 
division  of  labor,  the  whole  of  every  man's  attention  comes  nat- 
urally to  be  directed  towards  some  very  simple  object.  It  is 
naturally  to  be  expected,  therefore,  that  some  one  or  other  of 
those  who  are  employed  in  each  particular  branch  of  labor 
should  soon  find  out  easier  and  readier  methods  of  performing 
their  own  particular  work,  wherever  the  nature  of  it  admits  of 
such  improvement.  A  great  part  of  the  machines  made  use 
of  in  those  manufactures  where  labor  is  most  subdivided,  were 
originally  the  inventions  of  common  workmen,  who  being  each 
of  them  employed  in   some  very   simple   operation,   naturally 


88  ECONOMICS 

turned  their  thoughts  towards  finding  out  easier  and  readier 
methods  of  performing  it.  Whosoever  has  been  much  accus- 
tomed to  visit  such  manufactures,  must  frequently  have  been 
shown  very  pretty  machines,  which  were  the  inventions  of  such 
workmen,  in  order  to  facihtate  and  quicken  their  own  particular 
part  of  the  work.  In  the  first  fire-engines,  a  boy  was  con- 
stantly employed  in  opening  and  shutting  alternately  the  com- 
munication between  the  boiler  and  the  cylinder,  according  as 
the  piston  either  ascended  or  descended.  One  of  those  boys, 
who  loved  to  play  with  his  companions,  observed  that,  by  tying 
a  string  from  the  handle  of  the  valve  which  opened  this  com- 
munication to  another  part  of  the  machine,  the  valve  would  open 
and  shut  without  his  assistance,  and  leave  him  at  liberty  to 
divert  himself  with  his  play-fellows.  One  of  the  greatest  im- 
provements which  has  been  made  on  this  machine  since  it  was 
first  invented,  was  in  this  manner  the  discovery  of  a  boy  who 
wanted  to  save  his  own  labor. 

60.  Increased  specialization. — The  complexity  of  the 
specialization  of  employment,  it  should  be  remarked  in 
passing,  is  constantly  increasing  as  industry  becomes 
more  intricate  and  more  difficult  of  comprehension. 
The  acquisition  of  proficiency  in  most  trades  has  al- 
ways required  a  long  period  of  apprenticeship,  but  for 
a  man  who  wishes  to  reach  the  top  in  any  trade  or  pro- 
fession to-day,  this  period  of  preparation  is  greatly 
extended.  Take,  for  example,  the  profession  of  med- 
icine. Fifty  years  ago  a  young  man  spent  two  or 
three  years  in  a  physician's  office,  obtained  a  certificate 
of  good  character,  went  before  the  state  examining 
board,  if  this  institution  existed — and  it  was  not  always 
found — and  obtained  a  license  to  practice  medicine. 
To-day,  in  many  states,  the  prospective  physician  must 
first  take  a  thorough  high  school  course,  follow  this 
with  four  years  of  severe  work  in  a  medical  college, 
and,  finally,  pass  a  supplementary  examination  set  by 


DIVISION  OF  LABOR  89 

the  state  board.  It  is  even  proposed  by  some  influ- 
ential physicians  to  require  several  years'  experience 
in  a  hospital,  under  supervision,  before  the  student  is 
permitted  to  practice.  In  mechanical  pursuits,  more- 
over, the  equipment  of  industrial  plants  has  now  become 
so  costly  and  intricate,  and  the  importance  of  mere  mus- 
cular activity  has  been  so  greatly  diminished,  that  men 
cannot  be  trusted  in  positions  of  responsibility  unless 
they  have  mastered  the  details  of  their  employment  by 
a  long  and  arduous  study,  supplemented  by  experience. 
In  many  instances,  intricate  and  costly  processes  are 
performed  entirely  by  machinery,  without  any  labor 
being  directly  utilized.  In  such  industries,  a  high  de- 
gree of  technical  skill  is  required  in  the  operatives  who 
direct  these  processes  and  handle  machinery.  The  best 
illustration  of  this  general  statement  is  furnished  by 
the  steel  industry.  The  following  description  of  the 
machinery  employed  in  open-hearth  steel  making,  shows 
the  extent  to  which  labor  has  been  superseded  by 
mechanical  appliance. 

An  open-hearth,  or  Siemens-Martin,  furnace  in  its  many 
forms  has  much  the  outward  appearance  of  a  gigantic  baker's 
oven  well  strapped  with  iron  buckstaves.  There  is  an  iron  door, 
and  through  this  when  opened  may  be  seen,  on  the  hollowed  re- 
fractory floor  of  the  furnace,  a  pool  of  bubbling  molten  metal 
of  40  or  50  tons,  brought  to  so  intense  a  heat  that  the  eye  can 
no  more  look  at  it  than  on  the  noonday  sun.  The  particular 
row  of  furnaces  I  have  in  mind  is  one  of  the  sets  of  the  Home- 
stead Works.  There  are  20  altogether,  and  they  were  com- 
menced about  two  years  ago,  when  ten  47-ton  furnaces  (actual) 
were  erected.  After  only  one  year  had  elapsed  ten  more  fur- 
naces were  built  of  rather  larger  capacity,  working  50-ton 
charges.  At  the  time  of  my  visit  four  more  of  the  larger  size 
were  in  progress,  making  24  in  all ;  but  further  ones  were  shortly 


90  ECONOMICS 

to  be  added.  This  instance  of  rapid  progress  by  no  meaiw 
stands  alone ;  it  is  typical. 

The  materials  used  for  producing  the  mild  steel — pig  iron, 
scrap,  and  ore — are  taken  from  the  railway  wagons  by  electric 
traveling  cranes,  and  placed  in  iron  charging  boxes  or  troughs 
which  are  carried  on  small  trucks.  These  boxes  form  part  of 
a  very  ingenious  machine  which  constitutes  a  leading  feature  in 
a  good  many  steel  plants  of  America.  This  is  known  as  the 
Wellman-Seaver  charging  machine.  It  is  one  of  the  most  im- 
portant of  the  labor-saving  appliances  used  in  the  United 
States  steel  works.  The  charging  platform  of  a  battery  of 
open-hearth  furnaces  has  rails  laid  on  it  running  parallel  with 
the  row  of  furnaces.  Upon  these  the  charging  machine  is 
traversed  on  its  wheels  so  as  to  command  each  furnace  door  in 
turn.  The  machine  consists  essentially  of  a  strong  platform  and 
framework,  upon  which  are  the  charging  mechanism  and  the 
electrical  motors  that  perform  all  the  operations.  The  machine 
is  traversed  on  its  rails  until  it  is  opposite  to  the  charging  door 
of  the  furnace,  the  charging  box  on  its  bogie  being  between  the 
furnace  and  the  machine.  The  operator,  seated  on  the  machine, 
simply  by  turning  an  electrical  switch  causes  a  strong  steel  arm 
or  charging-bar  to  be  thrust  forward.  This  grasps  the  charg- 
ing box,  pushes  it  bodily  through  the  open  door  into  the  glow- 
ing furnace,  and,  turning  it  over,  spills  the  contents  into  the 
pool  of  seething  metal — or  bath,  as  it  is  technically  called.  As 
the  furnace  doors  are  opened  by  hydraulic  means,  and  as  the 
bogies  carrying  the  charging  boxes  are  also  moved  by  the  ma- 
chine, no  labor  is  needed  beyond  that  of  the  attendant  who  puts 
the  mechanism  into  action.  A  charge  of  half  a  ton  is  placed  in 
the  furnace  with  almost  incredible  smoothness  and  swiftness,  a 
few  seconds  being  quite  sufficient  for  the  purpose. 

This  is  the  new  way  of  charging  an  open-hearth  furnace. 
The  old  way  (which  is  largely  the  present  way)  is  exactly  that 
which  would  have  been  followed  by  Adam,  or  by  Tubal  Cam, 
if  he  had  had  a  furnace  to  charge.  The  Wellman-Seaver  ma- 
chine is  an  advance  at  a  stride.  It  carries  us  from  the  most 
primitive  form  of  labor  to  that  of  a  wonderfully  organized 


DIVISION  OF  LABOR  91 

apparatus,  actuated  by  the  subtle  power  of  which  we  now  hear 
so  much  and  have  learnt  so  little,  but  which  we  know  is  destined 
to  relieve  humanity  of  a  great  part  of  the  drudgery  of  civiliza- 
tion. By  machinery  of  this  kind  men  are  set  free  to  exercise 
those  higher  gifts  which  are  the  common  heritage  of  all,  but 
which  are  too  often  submerged  by  continuous  labor  of  an 
arduous  nature  carried  out  under  distressing  conditions.^ 

In  every  trade  and  profession  the  need  of  specialized 
training  is  on  the  increase.  The  complexity  of  modern 
life  makes  this  inevitable.  This  specialization  has  the 
great  advantage  of  increasing  the  efficiency  of  the 
worker.  This  is  clearly  seen  in  the  profession  of  med- 
icine where  we  now  have  physicians  for  nearly  every 
organ  of  the  body.  We  have  men  who  specialize  on 
the  treatment  of  the  ear,  the  eye,  the  throat,  on  lung 
diseases,  on  diseases  of  the  heart  and  stomach.  We 
have  lawyers  who  practice  nothing  but  patent  law  or 
criminal  law  or  real  estate  law.  The  all-round  engineer 
has  passed  away,  and  we  now  have  the  civil  engineer, 
the  mechanical  engineer,  the  electrical  engineer  and  the 
chemical  engineer.  Even  in  the  machine  shop,  special- 
ization has  entered  and  the  day  of  the  all-round  machin- 
ist, the  man  who  could  operate  almost  any  tool,  is  nearly 
ended. 

61.  Illustration  from  the  meat-packing  industry. — 
The  packing  industry,  already  referred  to,  furnishes 
abundant  illustration  of  the  extent  to  which  extreme 
specialization  has  been  carried.  For  example,  three  men 
are  employed  in  getting  the  brains  out  of  a  steer's  skull. 
One  man  has  been  a  member  of  this  gang  for  twenty 
years;  he  is,  for  all  practical  purposes,  a  machine,  and 
he  repeats  his  part  of  the  work  thousands  of  times  with- 
out perceptible  variation. 

1 "  American  Engineering  Competition,"  p.  45. 


J 


92  ECONOMICS 

It  would  be  difficult  to  find  another  industry  where  division  of 
labor  has  been  so  ingeniously  and  microscopically  worked  out. 
The  animal  has  been  surveyed  and  laid  off  like  a  map ;  and 
the  men  have  been  classified  in  over  thirty  specialties  and  twenty 
rates  of  pay,  from  sixteen  cents  to  fifty  cents  an  hour. 
The  fifty-cent  man  is  restricted  to  using  the  knife  on  the  most 
delicate  parts  of  the  hide  (floorman),  or  to  using  the  ax  in 
splitting  the  backbone  (splitter),  and  wherever  a  less  skilled 
man  can  be  slipped  in  at  eighteen,  eighteen  and  a  half,  twenty, 
twenty-one,  twenty-two  and  a  half,  twenty-four,  twenty-five 
cents,  and  so  on,  a  place  is  made  for  him  and  an  occupation 
mapped  out.  In  working  on  the  hide  alone  there  are  nine  posi- 
tions at  eight  diflferent  rates  of  pay.  A  twenty-cent  man  pulls 
off  the  tail,  a  twenty-two-and-a-half-cent  man  pounds  off  an- 
other part  where  the  hide  separates  readily,  and  the  knife  of  the 
forty-cent  man  cuts  a  different  texture  and  has  a  different  "feel" 
from  that  of  the  fifty-cent  man.  Skill  has  become  specialized 
to  fit  the  anatomy. 

In  this  way,  in  a  gang  of  230  men  killing  105  cattle  an  hour, 
there  are  but  11  men  paid  50  cents  an  hour,  3  men  paid  45 
cents,  while  the  number  getting  20  cents  and  over  is  86  and  the 
number  getting  under  20  cents  is  144.^ 

62.  Economies  effected  by  division  of  labor. — Three 
objects  are  gained  by  this  division  of  labor.  First, 
cheaper  men — unskilled  and  immigrant  labor — can  be 
utihzed  in  large  numbers.  Second,  skilled  men  become 
more  highly  expert  in  the  quality  of  their  work. 
While,  on  the  one  hand,  this  greatly  increases  the 
proportion  of  low-wage  men,  it  also  pushes  up  the 
wages  of  the  very  few  skilled  men  on  the  delicate  and 
particular  parts  of  the  work.  An  all-round  butcher 
might  expect  to  earn  35  cents  an  hour,  but  the  highly 
specialized  floorman  or  splitter  earns  50  cents  an  hour. 
Some  of  these  expert  floormen  work  a  week  at  a  time 

•    1  Common's  "  Trade  Unionism." 


DIVISION  OF  LABOR  98 

without  cutting  a  single  hide,  so  deft  and  delicate  be- 
comes their  handling  of  the  knife.  If  the  company 
makes  a  few  of  these  particular  jobs  desirable  to  the 
men  and  attaches  them  to  its  service,  it  can  become  inde- 
pendent of  the  hundreds  who  work  at  the  jobs  where 
they  can  do  but  little  damage ;  and  their  low  wage  brings 
down  the  average  to  21  cents  where,  if  all  were  all-round 
butchers,  the  average  would  be  35  cents.  Consequently, 
in  the  course  of  time,  the  companies  put  a  few  of  the 
strongest  men  and  those  with  a  particular  knack  for  their 
work  on  "steady  time,"  paying  them  a  salary  of  $24  to 
$27  a  week,  regardless  of  the  time  actually  worked;  but 
the  other  nine-tenths  of  the  gang  are  hired  by  the  hour 
and  paid  for  the  time  at  work.  These  steady-time  men 
not  only  stand  by  the  company,  but  act  as  pace  setters; 
and  in  this  way  a  third  object  of  division  of  labor  is 
brought  about,  namely,  speed. 

This  minute  division  of  labor  grew  with  the  slaughter- 
ing industry,  following  the  introduction  of  the  refrig- 
erator car  and  the  marketing  of  dressed  beef  in  the 
decade  of  the  seventies.  Before  the  market  was 
widened  by  these  revolutionizing  inventions,  the  killing 
gangs  were  small,  since  only  the  local  demands  were 
supplied.  But  when  the  number  of  cattle  to  be  killed 
each  day,  increased  to  a  thousand  or  more,  an  increas- 
ing gang  or  crew  of  men  was  put  together;  and  the 
best  men  were  kept  at  the  most  exacting  work.  At 
what  point  the  greatest  economy  is  reached  was  discov- 
ered by  experiment  and  by  comparison  of  one  house 
with  another.  Taking  a  crew  of  230  butchers,  helpers, 
and  laborers  handling  1,050  cattle  a  day  under  the  union 
regulations  of  output,  the  time  required  for  each  bullock 
from  the  pen  to  the  cooler,  the  hide  cellar,  and  all  the 
other  departments,  to  which  the  animal  is  distributed, 


94  ECONOMICS 

is  equivalent  to  131  minutes  for  one  man.  But  this 
is  made  up  of  6.4  minutes  for  the  50  cent  man,  li/^  min- 
utes for  the  45  cent  man,  and  so  on;  and  the  average 
wage  per  hour  for  the  gang  men  would  not  exceed  21 
cents,  making  the  entire  labor  cost  about  46  cents  per 
bullock. 

63.  Narrowing  effect  of  specialization  and  its  rem- 
edy.— By  some,  this  narrow  specialization  of  activity  is 
deplored.  It  is  claimed  that  men  who  do  only  one  thing 
are  less  useful  citizens  and  are  of  less  use  to  themselves 
than  men  with  broad  interests.  It  is  claimed,  more- 
over, that  when  a  man  is  turned  into  a  machine,  his 
power  of  initiative  and  ambition  are  destroyed,  and  he 
falls  into  a  groove  from  which  he  is  not  anxious  to 
escape.  The  answer  to  this  argument  is  that  the  broad 
training  may  be  secured  in  advance  of  entering  upon 
the  employment  in  manual  training  schools  or  technical 
institutions  of  various  kinds,  and  that  even  if  a  man  is 
occupied  in  performing  only  a  few  operations,  he  still 
has  ample  leisure  to  keep  up  with  the  progress  of  his 
profession  by  reading  and  studying. 

It  is  further  pointed  out,  and  this  is  an  argument  of 
much  weight,  that  invention  and  improvement  are 
enormously  furthered  by  the  subdivision  of  employ- 
ment. When  a  man  gives  his  entire  attention  to  one 
small  machine,  or  one  mechanical  operation,  he  comes 
in  time  to  so  thoroughly  understand  this  that  he  is 
frequently  able  to  suggest  changes  which  will  lighten 
his  labor  and  increase  the  speed  and  effectiveness  of  the 
operation.  In  all  large  works,  inventions  are  constantly 
being  made  by  employes,  whose  attention  has  been  called 
to  the  opportunity  of  improvement  by  the  concentra- 
tion of  their  attention  within  a  narrow  field. 


DIVISION  OF  LABOR  95 

64.  Division  of  labor  and  specialization  of  plant. — 
This  minute  subdivision  of  industry  has  extended,  not 
merely  to  individual  employment,  but  to  organizations 
of  individual  employment.  In  every  industry  factories 
are  becoming  more  and  more  specialized  in  the  produc- 
tion of  one  thing.  No  matter  what  the  industry  may 
be,  cotton,  woolen,  leather,  glass  or  copper  manufac- 
ture, the  tendency  to  specialize  in  the  production  of  one 
thing  is  on  the  increase.  The  reason  is  as  follows: 
Specialization  means  that  the  entire  energies  of  the  mill- 
force  are  concentrated  on  the  production  of  one  thing, 
which  enables  that  thing  to  be  produced  at  lower  cost 
than  if  a  number  of  articles  are  produced  under  the 
same  roof.  A  factory,  just  as  a  man,  can  do  a  few 
things  much  more  efficiently  than  many  things.  "Jack 
of  all  trades  and  master  of  none"  is  as  true  of  large 
enterprises  as  of  individuals.  For  the  same  reason 
specialized  industry  finds  a  readier  sale  for  its  products. 
A  mill  becomes  known  in  a  certain  line  because  it  turns 
out  only  one  thing;  and  when  a  particular  article  is 
wanted,  the  name  of  that  mill  at  once  rises  in  the  buy- 
er's mind. 

A  minor  advantage  of  specialized  industry,  which  is 
often,  however,  of  great  importance,  is  that  the  surplus 
stock  of  such  a  plant,  consisting,  as  it  does,  of  only  one 
kind  of  goods,  is  much  more  available  for  quick  deliv- 
eries and  to  satisfy  sudden  and  urgent  demands,  than 
when  the  stock  includes  a  number  of  articles,  in  which 
case,  any  extra  demand  will  soon  exhaust  it,  and  compel 
the  company  to  decline  orders,  and  thus  lose  custom. 

65.  Illustrations  of  economies  of  specialization. — 
The  following  illustrations  of  the  effect  of  specializa- 
tion in  decreasing  costs  are  drawn  from  a  lecture  deliv- 


96  ECONOMICS 

ered  a  few  years  ago  by  Mr.  A.  E.  Outerbridge,  Jr., 
of  Philadelphia,  one  of  the  leading  engineers  in  the 
United  States. 

Specialization,  in  manufacturing,  means  that  the  manufac- 
turer selects  some  article  for  which  there  is  a  big  demand  and 
devotes  his  time  to  it,  so  as  to  reduce  the  cost  and  be  in  partial 
control  of  the  trade.  I  will  give  a  few  illustrations  from  ex- 
perience and  observation  where  the  same  machinery  and  appli- 
ances are  used,  but  the  quantity  is  increased.  In  making  two 
particular  parts  of  a  machine,  the  actual  cost  (these  are  figures 
taken  from  the  cost  books)  was  $20.19.  One  part  is  seldom 
made  alone.  The  same  articles  in  lots  of  twelve  cost  $6.12.  If  I 
had  said  in  making  five  hundred,  you  might  have  been  prepared 
to  look  for  such  a  reduction,  but  when  I  say  there  is  a  reduction 
of  69  per  cent  upon  increasing  the  number  from  two  to  twelve 
what  does  it  mean.?  The  reason  is  that  in  putting  one  piece 
of  metal  on  a  machine  for  the  purpose  of  drilhng  or  milling  it, 
there  is  a  great  deal  more  time  required  in  setting  than  there  is 
to  do  the  work,  and  if  you  have  a  large  number  of  pieces  and 
the  same  setting  up  of  the  machine  will  answer  for  the  whole 
work,  the  cost  is  divided  up  among  the  larger  number  of  units 
being  operated  upon,  and  consequently  the  price  is  decreased. 

Another  illustration  is  furnished  by  a  small  piece  of  machine 
work,  a  brass  portion  of  a  machine  not  much  larger  than  a 
lead  pencil.  It  has  to  be  turned  inside  and  outside,  very  true 
in  measurement,  threads  cut  upon  it  and  they  have  to  be  just 
right.  The  actual  cost  of  doing  one  piece  is  25  cents,  the  cost 
of  two  is  15  cents,  the  cost  of  five  10  cents  each,  the  cost  of  ten 
5^  cents  each,  while  the  cost  of  500  is  2  cents  a  piece. 

66.  To  show  the  difference  in  cost  where  different 
machinery  and  different  processes  are  used. — The  first 
illustration  was  where  the  same  machine  and  the  same 
process  were  used,  the  only  difference  being  the  num- 


DIVISION  OF  LABOR  97 

ber.  Now  we  come  to  the  second  illustration,  where 
we  show  differences  in  cost  when  different  machines  and 
different  processes  are  used. 

For  making  one  hundred  ^"xis"  bolts  on  a  modern  lathe, 
by  reducing  the  body  of  a  bolt  from  a  bar  of  steel,  the  cost 
is  $15.84.  These  are  bolts  which  have  a  hexagonal  head  and 
a  thread  to  turn  upon.  The  bar  of  steel  from  which  such  bolts 
are  made  is  hexagonal  and  of  about  20  to  30  feet  in  length. 
The  modem  "turret"  lathe  is  an  instrument  so  constructed  that 
it  takes  the  end  of  this  bar  and  cuts  it  to  the  required  size. 
One  tool  after  another  (or  two  or  more  simultaneously  whenever 
possible)  is  brought  to  bear  on  the  bolt  until  it  is  completed, 
when  it  drops  into  a  box. 

When  the  "turret"  lathe  machine  was  brought  into  the  mar- 
ket it  was  such  a  great  advancement  over  the  ordinary  lathe  that 
the  concern  with  which  I  am  connected,  although  it  is  a  maker 
of  lathes,  felt  that  it  was  to  their  advantage  to  pay  $1,000  a 
piece  for  these  new  lathes  to  make  such  bolts,  because  they 
could  make  them  for  $15.84)  a  hundred,  whereas  by  their  own 
lathes  it  cost  $35.  That  was  considered  a  great  reduction  and 
our  pride  had  to  be  swallowed.  The  "turret"  lathe  is  a  ma- 
chine upon  which  there  are  revolving  turrets  and  there  are  a 
dozen  different  cutting  tools  arranged  in  the  arms  of  the  tur- 
rets, each  tool  performing  its  function.  One  tool  cuts  the  bar 
into  proper  lengths,  one  will  cut  the  thread,  another  put  on  the 
finishing  touches. 

This  concern  was  making  these  bolts  to  great  satisfaction, 
when  one  day  a  man  stepped  into  the  office  and  said  he  would 
be  pleased  to  have  us  look  at  a  new  bolt,  which  he  could  furnish 
us  for  $5.88  a  hundred.  We  examined  the  bolt  and  found  that 
it  was  better  than  we  were  making  ourselves.  Our  bolts  were 
made  out  of  hexagonal  bars  and  there  was  a  great  deal  of  waste 
in  scrap.  Now  this  man  had  found  that  he  can  take,  instead 
of  a  hexagonal  bar  the  size  of  the  head  of  the  bolt,  a  round  bar 
the    size    of    the    thread    and    to    that    weld    a    head    which 


98  ECONOMICS 

may  be  composed  of  any  metal  desired.  These  bolts  made  by 
welding  the  heads  to  the  body  of  the  bolt  are  sold  for  $5.88  a 
hundred. 

67.  Illustration  from  the  manufacture  of  incandescent  burn- 
ers.— When  Edison  first  made  his  incandescent  lamp  the  cost 
was  $3.  Now  there  are  many  similar  lamps  sold  for  less  than 
twenty  cents.  In  1881,  when  this  system  of  electric  lighting 
was  first  introduced  by  Mr.  Edison,  he  sent  an  invitation 
to  the  various  institutions  in  the  country  to  have  a  representa- 
tive come  and  see  the  lighting  of  Menlo  Park,  New  Jersey,  and 
I  was  selected  as  representative  of  the  Franklin  Institute.  I 
went  there  during  the  day  so  as  to  see  the  lamp  in  daylight,  and 
Mr.  Edison  took  me  over  the  works  and  showed  me  the  process 
of  making  the  lamps.  I  asked  him  how  much  it  cost  to  make 
them.  He  replied  $3  at  first  and  now  $1.50.  I  said  that  it 
appeared  to  me  that  that  price  is  prohibitive.  "Well,"  he  said, 
"young  man,  I  told  you  that  when  I  began  to  make  these  it  cost 
me  $3.  It  now  costs  $1.50.  Some  day  I  expect  to  make  them 
for  25  cents."  Twenty-five  years  later  I  had  occasion 
to  go  to  a  board  meeting  of  a  company  of  which  Mr.  Edison 
was  president.  I  took  my  seat  at  the  table  and  when  my  name 
was  called,  Mr.  Edison  recognized  me.  After  the  meeting  he 
came  and  spoke  to  me.  He  said,  "The  last  time  I  saw  you  I 
told  you  the  lamps  were  costing  me  $1.50  and  I  expected  to 
make  them  for  25  cents.  You  can  buy  all  you  want  for  19 
cents." 

68.  Second  result — continuous  processes. — The  sec- 
ond advantage  which  arises  from  the  division  of  labor 
is  that  it  enables  the  combination  of  a  large  number 
of  operations  into  a  continuous  process.  Consider,  for 
example,  the  operation  of  manufacturing  woolen  cloth 
already  described.  This  includes  a  large  number  of 
separate  processes,  extending  from  the  time  the  wool 
is  delivered  at  the  factory,  until  the  time  the  cloth  is 
delivered  to  the  railroad  for  shipment.  Each  one  of 
these  operations,  in  consequence  of  the  division  of  labor. 


DIVISION  OF  LABOR  99 

is  going  on  simultaneously.  At  every  minute  of  the 
working  day,  wool  is  being  received,  sorted,  cleaned, 
graded,  spun,  woven,  finished,  packed  and  shipped. 
While  the  mill  is  running,  it  may  almost  be  said  that  a 
stream  of  the  raw  materials  is  running  into  the  store 
room,  and  a  stream  of  the  finished  product  is  running 
out  of  the  shipping  room.  This  can  be  said  of  every 
factory  in  the  land.  The  productive  operation  is  every- 
where continuous;  it  is  not  a  series  of  disjointed  stages, 
but  a  continuous  flow,  a  steady  transformation  of  raw 
material  through  various  stages  into  the  finished  prod- 
ucts. 

It  is  obvious  that  this  continuity  of  production  would 
be  impossible  without  the  division  of  employment.  If 
the  men  who  received  the  wool  were  obliged  to  stop 
after  a  few  moments  and  sort  what  they  had  received; 
if  they  were  obliged  to  go  to  the  next  department  and 
clean  and  scour  the  wool,  and  then  to  carry  the  same 
lot  of  wool  on  through  the  operation  of  spinning  and 
weaving  and  finishing,  is  it  not  evident  that  the  pro- 
ductive power  of  each  one  of  them  would  be  enormously 
curtailed?  It  would  be,  in  fact,  the  barest  fraction  of 
what  it  is  under  the  present  system.  On  the  other 
hand,  by  giving  each  man  one  thing  to  do,  by  placing 
in  his  hands  the  care  of  one  of  a  large  number  of  con- 
tinuous stages  in  a  productive  process,  all  these  opera- 
tions can  be  performed  simultaneously;  every  man  can 
give  his  entire  strength  to  doing  that  thing  which  he 
has  learned  to  do  best,  and  the  various  operations  can  be 
made  to  so  supplement  each  other  as  to  result  in  a  pro- 
duction hundreds  of  times  larger  than  could  be  achieved 
by  one  man  working  by  himself. 


CHAPTER  IX 

LOCATION  OF  INDUSTRIES 

69.  Location  of  extractive  industries. — An  important 
aspect  of  the  division  of  labor  relates  to  the  specialization 
of  localities  in  conducting  those  industries  to  which  they 
are  best  suited.  Just  as  the  individual  confines  himself 
to  one  occupation  in  which  his  efforts  are  most  effective, 
so  the  city  or  the  locality  devotes  itself  to  specialized 
pursuits.  As  a  result  of  this  localization  of  industry, 
the  production  of  wealth  is  greatly  increased.  The 
causes  determining  the  localization  of  industry  are  as 
follows :  In  the  first  place,  all  the  operations  connected 
with  the  extractive  industries — ^mining,  agriculture, 
lumbering — are  necessarily  carried  on  where  the  natural 
resources  are  located.  Generally  speaking,  the  subse- 
quent operations  which  reduce  the  bulk  and  increase  the 
value  of  these  raw  materials  are  carried  on  at  the  source 
of  supply,  whenever  the  decrease  in  weight  more  than 
offsets  the  higher  freight  charges  that  result  from  the 
increased  value  given  to  the  raw  material  by  the  manu- 
facturing process.  The  lumber  industry  is  the  most 
common  example.  Logs  are  seldom  carried  far  to  the 
sawmill.  The  gain  in  value  from  the  log  to  the  plank 
is  not  so  great  as  to  call  for  a  freight  rate  much  higher 
than  that  charged  on  the  log;  while  the  loss  in  weight, 
from  the  first  sawing,  is  so  considerable  as  to  make  the 
expense  of  shipping  rough  boards  much  less  than  the 
cost  of  shipping  logs.     When  we  come  to  the  subsequent 

100 


LOCATION  OF  INDUSTRIES  101 

operations  of  wood  working,  however,  in  which  the 
rough  boards  are  planed  and  grooved  and  made  into 
furniture  and  other  articles,  then  we  find  that,  other 
things  being  the  same,  the  boards  are  shipped  the  long 
distances  and  the  furniture  and  woodwork  are  manu- 
factured as  near  as  possible  to  the  market  where  they 
are  to  be  sold.  This  illustration  shows  the  influence, 
upon  the  location  of  the  industry,  of  the  principle  regu- 
lating freight  rates,  viz.,  that  of  charging  a  higher  rate 
as  the  goods  become  more  valuable,  only  here  it  is  the 
shipper  who  is  concerned  to  make  his  freight  bill  as  low 
as  he  can  by  shipping  his  raw  materials  at  a  low  rate 
and  selling  his  finished  product,  which  must  pay  a  high 
rate,  near  the  factory. 

70.  The  influence  of  climate  upon  the  location  of 
industry. — Climate  has  often  a  decisive  influence  upon 
the  location  of  industry.  For  example,  in  all  forms  of 
spinning  and  weaving,  the  fibres  of  silk,  wool  or  cotton 
can  be  manipulated  much  more  readily  and  held  to- 
gether more  tenaciously  in  a  moist  atmosphere.  So 
important  is  this  influence  of  climate  that  in  many  New 
England  mills,  during  dry  weather,  artificial  means  are 
used  to  keep  the  atmosphere  of  the  mill  humid.  In  the 
manufacture  of  cigarettes,  on  the  other  hand,  a  dry 
climate  is  considered  necessary  in  order  to  preserve  the 
flavor  of  the  tobacco,  which  is  impaired  in  damp  air. 
Again,  industries  that  are  dependent  upon  the  applica- 
tion of  external  heat,  as  for  example,  all  forms  of  the 
iron  and  steel  industry,  try  to  avoid  locating  in  a  hot 
climate.  For  example,  the  iron  and  steel  industry  of 
Alabama  is  greatly  handicapped  because  it  must  rely 
upon  negro  labor.  The  climate  is  too  hot  for  white 
men  to  endure  the  additional  heat  of  the  iron  or  steel 
miU. 


102  ECONOMICS 

71.  Perishability  of  materials  an  important  influence 
on  location. — The  perishability  of  the  materials  has 
often  an  important  influence  on  the  location  of  the  in- 
dustry.    For  example,  the  juice  of  the  sugar  cane,  if 

[  allowed  to  stand  for  a  few  hours,  sours  and  spoils,  and 

the  sugar  is  lost.  For  this  reason,  and  also  because  the 
canes  must  be  crushed  soon  after  they  are  cut,  the  sugar 
house  must  be  located  near  the  cane  field.  The  canning 
of  salmon,  must,  for  the  same  reason,  be  carried  on  near 
the  source  of  supply.  The  manufacture  of  butter  and 
cheese  illustrates  the  same  principle. 

72.  Supply  of  fuel  or  water  power  an  important 
bearing  on  location. — The  supply  of  fuel  or  of  water 
power  has  an  important  bearing  on  the  location  of  in- 
dustry. Water  power  is  much  cheaper  than  steam 
power  and,  for  this  reason,  power  industries  centre  about 
it.  The  supply  of  coal,  however,  is  practically  un- 
limited, while  the  supply  of  water  power  is  quickly  taken 
up,  and  coal  can  be  carried  long  distances  at  compara- 
tively small  cost.  For  these  reasons,  whenever  an  in- 
creasing demand  greatly  raises  the  rental  or  price  of  water 
power,  industries  tend  to  leave  the  water- falls  and  move 
toward  the  coal  mines.  Other  things  being  equal, 
industries  will  always  seek  the  location  of  the  cheapest 
power.  It  is  for  these  reasons  that  most  of  the  cotton 
mills  built  in  the  United  States  in  recent  years  have 
been  erected  in  the  South  where  the  numerous  rivers  of 
that  section  fall  from  the  highlands  into  the  costal  plain. 
The  development  of  electric  power  transmission  for 
long  distances  has  widened  the  circle  of  location  of  in- 
dustries depending  on  electric  power,  and  has  given 
promise  that,  by  its  further  development,  water  power 
of  mountain  and  upland  regions  which  is  now  unavail- 
able because  of  its  location  may  some  day  be  used.     In 


LOCATION  OP  INDUSTRIES  lOS 

this  connection  it  should  be  noted  that  in  the  vast 
majority  of  cases  materials  are  moved  down  hill  and  the 
lighter  products  are  taken  back  up  the  grade.  Very- 
few  upland  regions  can  be  the  seats  of  great  industrial 
centres. 

73.  Industries  utilizing  waste  products. — Many  in- 
dustries are  calculated  to  utilize  either  the  waste 
products  or  the  surplus  labor  of  other  industries,  and  are, 
therefore,  located  close  to  them.  Thus  in  Armour's 
packing  plant  there  are  fifty-two  separate  departments. 
The  hoofs  of  the  animals  are  made  into  glue,  the  largest 
glue  factory  in  the  world  being  located  here.  A  large 
soap  factory  to  utilize  a  portion  of  the  oils  and  fats;  a 
curled  hair  factory;  a  factory  for  the  manufacture  of 
brush  handles,  paper  cutters  and  other  bone  articles;  a 
factory  for  the  manufacture  of  articles  of  horn,  such  as 
combs,  buttons,  etc. ;  a  fertilizer  factory  which  works  up 
bones,  ofFal  and  blood,  and  many  other  departments  are 
included  in  this  one  business.  An  example  of  an 
industry  so  located  as  to  utilize  surplus  labor  is  fur- 
nished by  the  presence  of  the  silk  industry  in  the  iron 
towns  of  eastern  Pennsylvania.  The  women  and  girls 
who  would  otherwise  be  unemployed  find  work  in  the 
silk  mills. 

74.  Residence  of  consumer  decisive  factor  in  location 
of  some  industries. — The  residence  of  the  consumer  is 
the  decisive  factor  in  the  location  of  many  industries. 
These  are  the  so-called  serv^ice-industries,  such  as  shoe 
mending,  barbering,  etc.,  and  all  those  industries  that 
produce  goods  for  the  personal  and  individual  inspec- 
tion of  the  consumer — such  as  tailoring,  millinery,  dress- 
making, photographing  and  newspapers.  All  indus- 
tries, finally,  which  can  be  carried  on  as  well  in  one  place 
as  in  another,  and  in  the  value  of  whose  products  trans- 


i04>  ECONOMICS 

portation  cost  does  not  figure  largely,  as  a  rule,  seek  the 
consumer. 

75.  Specialization  of  labor  a  determining  factor. — 
Specialization  of  labor  is  often  a  determining  factor  in 
locating  an  industry.  A  population,  such  as  that  of 
southern  New  England,  for  example,  may  have  been 
trained  for  generations  in  particular  occupations  until 
it  comes  to  acquire,  often  it  would  seem  by  inheritance, 
remarkable  dexterity  in  them.  Knife  and  saw  making, 
all  kinds  of  brass  work  and  other  industries  requiring 
a  high  order  of  skill,  are  chiefly  carried  on  in  Connecti- 
cut, for  the  reasons  that  here  is  the  largest  supply  of 
highly  skilled  labor.  This  factor,  however ,^  is  decreasing 
in  importance  with  the  increasing  tendency  of  the  people 
to  move  freely  about  the  country  and  with  the  general 
spread  of  manual  training  and  technical  education. 

76.  Cheapness  of  labor  a  decisive  influence. — The 
cheapness  of  labor  may  be  a  decisive  influence  in  the 
location  of  industries.  This  is  most  important  in  those 
industries  which  are  still  in  a  backward  condition,  that  is 
to  say,  in  which  machinery  has  not  seriously  entered, 
and  where,  therefore,  the  cost  of  labor  is  of  great  im- 
portance. Such  industries  are  the  manufacture  of 
clothing,  linen,  underwear,  gloves,  millinery  and  cigars. 
The  most  familiar  of  these  in  reference  to  the  importance 
of  cheap  labor,  is  the  manufacture  of  clothing.  This  is 
carried  on  principally  in  the  large  cities,  where  it  is  given 
out  by  contract  to  men  who  hire  the  lowest  grade  of 
labor,  usually  foreigners,  who  are  used  to  long  hours 
and  low  wages  at  home,  and  who  work  often  sixteen 
hours  a  day  for  thirty  to  fifty  cents.  This  is  called  the 
"sweating  system,"  and  since  it  is  justly  considered  to  be 
highly  injurious  to  public  welfare,  many  laws  have  been 
directed  against  it,  and  some  attempts  have  been  made 


LOCATION  OF  INDUSTRIES  105 

to  enforce  these  laws.     These  efforts  have,  as  yet,  been 
only  partly  successful. 

77.  Changes  in  the  location  of  industry. — As  a 
general  principle,  industry  may  be  said  to  arrange  itself 
about  definite  centres  where  markets  are  largest  and 
where  the  raw  materials  can  be  most  easily  assembled. 
The  tendency  is  to  scatter  these  centers  over  the  country 
whenever  a  particular  district  has  grown  populous 
enough  to  afford  a  good  market.  The  main  reason  is 
that  which  was  explained  at  the  beginning  of  this  sec- 
tion— the  lower  freight  charges  on  the  raw  material  as 
compared  with  the  finished  product,  which  always  makes 
it  an  object  to  a  manufacturer  to  get  as  close  as  possible 
to  his  market.  Only  in  those  cases — to  repeat  a  former 
statement — where  the  gain  in  the  smaller  weight  of  the 
product  is  more  than  sufficient  to  counterbalance  the 
higher  cost  of  transporting  manufactured  products  does 
industry  in  its  location  cling  to  the  raw  material;  and 
these  industries  are  generally  those  in  which  the  increased 
value  resulting  from  the  manufacturing  operation  is 
not  great.  A  further  influence  working  for  the 
diffusion  of  industry  in  scattered  groups  over  a  wide 
area,  is  the  general  distribution  of  raw  material.  Tim- 
ber, iron,  coal,  copper,  lead,  clay,  petroleum,  stone,  etc. 
are  found  in  many  places.  Even  those  materials  which 
are  produced  in  one  portion  of  the  country  are  generally 
equidistant  from  many  other  portions,  in  some  of  which 
manufacturing  cities  are  found,  and  some  not.  Take 
cotton,  for  example.  The  cotton  fields  of  Arkansas  are 
nearer  to  Kansas  City  than  the  cotton  fields  of  North 
Carolina  are  to  Fall  River,  Massachusetts,  and  yet,  even 
to-day  cotton  goods  are  carried  from  Fall  River  and  sold 
in  Kansas  City.  This  condition  can  only  be  temporary, 
and  in  the  same  way  that  we  have  seen  the  shoe  industry 


106  ECONOMICS 

grow  up  in  the  middle  west,  so,  in  the  progress  of  our 
industrial  development,  will  all  the  important  branches 
of  manufacture  tend  to  follow  the  currents  of  popula- 
tion, finally  locating  where  the  markets  are  largest. 

78.  Pittsburgh  as  an  illustration. — A  striking 
example  of  the  reasons  for  an  industrial  location,  which 
will  serve  to  conclude  this  section,  is  furnished  by  Pitts- 
burgh. This  city  is  the  centre  and  chief  seat  of  the  iron 
and  steel  trade  of  the  United  States.  Nearly  half  the 
steel  purchased  in  this  country  is  made  in  Pittsburgh. 
In  and  around  the  city  are  more  than  4,000  establish- 
ments engaged  in  the  manufacture  of  iron  and  steel, 
and  yet  Pittsburgh  has  no  workable  iron  beds  nearer 
than  1,000  miles.  It  is  from  the  iron  mines  of  Lake 
Superior,  owing  to  the  purity  and  abundance  of  the  ore 
which  they  produce,  that  substantially  all  the  iron  ore 
used  in  the  Pittsburgh  and  adjoining  districts  is  taken. 
It  would  seem,  on  the  face  of  things,  that  Pittsburgh  is 
not  a  desirable  location  for  an  industry  whose  source  of 
supply  is  so  far  distant. 

Let  us,  however,  consider  the  other  elements  in  the 
problem.  Pittsburgh  lies  almost  equidistant  from  the 
great  markets  of  the  East  and  West.  From  this  point, 
under  present  conditions,  the  majority  of  iron  and  steel 
consumers  in  the  United  States  can  be  most  easily 
reached.  This  cannot  be  said  of  a  location  at  the  head 
of  Lake  Superior  and,  according  to  the  rule  of  freight 
charges,  the  transportation  of  the  raw  material  is  usually 
preferred  to  that  of  the  finished  product.  But  there 
are  other  reasons  for  the  pre-eminence  of  Pittsburgh  as 
an  iron  and  steel  centre.  The  iron  industry  requires 
large  supplies  of  coal  and  gas.  Pittsburgh  is  built  upon 
a  coal  bed,  while  nearby  are  the  natural  gas  fields  of 
western   Pennsylvania.     Furthermore,    and    most   im- 


LOCATION  OF  INDUSTRIES  107 

portant  of  all,  just  south  of  Pittsburgh  lies  the  famous 
Connellsville  coke  region,  where,  from  a  basin  thirty 
miles  long  by  three  wide,  the  coal  is  mined,  out  of 
which  nearly  all  the  coke  used  in  iron  smelting  in  the 
United  States  is  made. 

•  79.  Proximity  to  supplies  of  coking  coal. — Coke  con- 
sists of  the  fixed  carbon  of  the  coal  with  some  of  the 
carbon  contained  in  the  volatile  matter.  It  is  manu- 
factured by  burning  a  coking  coal  in  a  closed  receptacle 
until  nearly  all  the  gas  has  passed  off,  leaving  the  carbon 
in  large  sponge-like  pieces  made  up  of  myriads  of  little 
carbon  cells,  and  greatly  increased  in  bulk.  This  coke 
makes  the  best  fuel  for  iron  smelting  for  reasons  which 
will  now  be  given.  Iron  ore,  as  we  saw,  is  composed  of 
rock  material  and  pure  iron  in  combination  with  oxygen. 
In  iron  smelting  the  object  is  to  free  the  iron  from  the 
oxygen  and  the  impurities  associated  with  it.  This  is 
done  by  mixing  with  the  iron  ore,  in  a  blast  furnace, 
some  kind  of  fuel  and  a  quantity  of  limestone  in 
alternate  layers,  setting  the  mass  on  fire,  and  forcing  a 
blast  of  air  through  it  to  hasten  combustion.  The 
oxygen  is  released  during  the  process  of  burning  and 
unites  with  the  carbon  in  the  fuel,  while  the  limestone 
melts  and  unites  with  the  rock  material  in  the  iron  ore, 
forming  what  is  known  as  slag.  The  iron  is  thus  set 
free  and  becomes  liquid,  gradually  sinking  to  the  bottom 
of  the  furnace,  while  the  slag,  being  lighter  than  the 
molten  iron,  floats  on  top  of  the  iron.  At  the  bottom  of 
the  furnace,  at  periodical  intervals,  the  slag  and  the  iron 
can  thus  be  drawn  off  separately,  and  the  iron  can  be 
run  into  sand  molds  and  allowed  to  cool,  when  it  is 
available  for  use. 

Coke,  as  compared  with  soft  coal,  makes  the  better 
fuel  for  tliis  purpose  of  iron  smelting  for  three  reasons : 


108  ECONOMICS 

(1)  It  does  not  run  together  and  make  a  cake  as  does 
soft  coal,  so  that  it  offers  no  obstacle  to  the  passage  of 
the  air  blast  up  through  the  furnace;  (2)  it  retains  its 
shape  in  the  furnace  and  holds  up  the  great  weight  which 
rests  upon  it,  thus  making  combustion  more  perfect;  (3) 
owing  to  its  cellular  structure  it  offers  a  greater  burning 
surface  and  so  produces  a  greater  heat  than  soft  coal. 
Hard  coal,  although  formerly  much  used,  is  now  so 
expensive  as  to  be  out  of  reach.  Connellsville  coke  is 
by  far  the  best  and  purest  coke  made,  and  Pittsburgh 
is  nearer  than  any  other  iron  centre  to  the  Connellsville 
field.  Pittsburgh,  then,  at  the  present  time,  is  the  place 
at  which,  all  things  considered,  the  materials  of  iron  and 
steel  manufacture  can  be  most  cheaply  assembled,  and 
from  which  the  products  can  be  most  cheaply  dis- 
tributed. Chicago,  Cleveland  and  Buffalo  are  also 
important  iron  centres,  but  either  because  of  distance 
from  large  markets  or  long  rail  transportation  of 
material,  they  have  not  yet  attained  the  position  that 
Pittsburgh  enjoys,  although,  as  the  demand  for  steel  in 
the  West  increases,  that  section  will  develop  a  much 
larger  steel  industry  than  it  has  at  present.  The  United 
States  Steel  Corporation,  recognizing  the  advantage  of 
proximity  of  the  mill  to  the  rapidly  growing  markets 
of  the  West,  has  erected  a  group  of  sleel-making  plants 
at  Gary,  near  Chicago,  and  another  group  of  mills  is 
projected  for  Duluth. 


CHAPTER  X 

LARGE-SCALE  PRODUCTION 

80.  Large-scale  production  defined. — Large-scale 
production  is  an  indefinite  term  and  in  reality  is  merely 
relative.  A  process  that  would  be  classed  as  large-scale 
production  in  one  generation  would  not  be  so  classed  in 
the  next,  because  of  improved  methods;  and  further, 
it  is  impossible  to  say  when  small-scale  production  ceases 
and  large-scale  production  commences  in  any  given  case. 
We  may  broadly  define  large-scale  production  as  pro- 
duction which  is  carried  on  with  sufficient  capital  to 
enable  the  producers  to  employ  all  of  the  most  modern 
appliances  and  methods  to  facilitate  and  cheapen  pro- 
duction. It  now  characterizes  most  of  the  leading  in- 
dustries in  the  iron  industry  of  the  United  States. 

Iron  ore  was  discovered  in  the  Lake  Superior  region 
when  the  iron  industry  of  the  country  was  already 
centered  at  Pittsburgh.  Instead  of  moving  the  industry 
from  Pittsburgh,  the  coal  supply,  to  the  Great  Lakes, 
the  iron  supply,  the  manufacturers  of  iron  chose  to 
transport  the  iron  to  the  coal  district.  The  problem 
was,  therefore,  the  cheap  transportation  of  the  iron  ore 
to  Pittsburgh.  Steamboats  carried  the  ore  down  the 
lakes  to  Conneaut  at  the  foot  of  Lake  Erie,  and  the  ore 
was  unloaded  from  the  boats  with  wheelbarrows  and 
shovels.  Such  a  method  would  be  characterized  as 
small-scale  production.  To-day  iron  ore  is  dug  from 
some  of  the  ore  fields  with  a  steam  shovel,  just  as  dirt 
is  dug  out  of  a  railroad  cut.     The  steam  shovel  throws 

109 


no  ECONOMICS 

the  ore  on  the  cars,  which  are  hauled  to  the  lake  and  the 
contents  emptied  into  a  high  ore  wharf.  From  tliis 
wharf  the  iron  ore  is  dropped  through  chutes  into  the 
holds  of  the  ore  ships.  In  all  these  processes  no 
muscular  energy  has  been  devoted  to  lifting  the  iron 
'  ore.  All  the  work  has  been  effected  by  mechanical 
means. 

The  ore  vessel  proceeds  to  the  lower  lake  ports,  where 
special  electric  machinery  operates  huge  grab  buckets 
which  drop  into  the  hold  of  the  ship,  scoop  up  from  six 
to  ten  tons  of  ore  at  once,  and  carry  it  to  the  cars  waiting 
to  convey  it  to  Pittsburgh.  By  means  of  these  grabs 
working  on  a  modern  ship,  ten  thousand  tons  of  ore  have 
been  transferred  from  the  vessel  to  the  cars  in  six  hours. 
The  process  of  unloading  the  ore  reduces  the  cost  to  the 
sum  of  two  cents  a  ton,  a  price  impossible  to  the  small- 
scale  producer,  performing  the  work  by  hand  labor. 

Large-scale  production  is  of  comparatively  modern 
•  development.  It  has  been  developed  during  the  last 
quarter  of  the  Nineteenth  Century  because  the  great  ag- 
gregations of  capital  have  made  possible  the  installation 
of  the  mechanical  appliances  on  which  large-scale  pro- 
duction so  intimately  depends. 

81.  Centralization  of  production. — Large-scale  pro- 
duction means  a  centralization  of  larger  amounts  of 
capital,  of  more  wage  workers  and  of  a  greater  product 
in  fewer  and  fewer  establishments.  Instances  showing 
this  development  can  be  picked  from  the  tables  almost 
at  random.  For  example,  the  cotton  goods  industry  had 
in  1850  a  capital  of  $74,500,000;  it  employed  92,286 
wage  earners  and  produced  $61,900,000  worth  of  pro- 
duct in  1,094  estabhshments.  By  1870  the  capital  had 
increased  to  $140,700,000,  the  number  of  wage  workers 
to  135,369,  the  product  to  $177,500,000,  while  the  num- 


I 


LARGE   SCALE  PRODUCTION  111 

ber  of  establishments  had  decreased  to  956.  In  1909, 
forty  years  later,  while  the  amount  of  capital  invested 
was  $822,238,000,  the  number  of  wage  workers  em- 
ployed, 378,880,  and  the  amount  of  the  product,  $628,- 
392,000,  the  number  of  establishments  had  increased 
only  to  1,324. 

The  same  centralization  is  shown  in  the  slaughtering 
and  packing  industry.  In  1880  the  capital  invested  in 
this  field  was  $49,419,000,  and  the  number  of  wage 
workers  employed  27,000,  the  value  of  the  product 
$303,562,000.  In  1909  the  capital  invested  was  $383,- 
249,000,  the  number  of  wage  workers  90,000,  the  amount 
of  product  $1,370,568,000.  In  this  case  the  value  of  the 
product  in  1909  was  more  than  four  times  that  in  1880, 
and  the  increase  in  the  number  of  establisliments  during 
this  period  of  thirty  years  was  from  872  to  1,641,  or  only 
100  per  cent. 

The  conditions  in  the  iron  industry  are  particularly 
interesting,  for  there  large-scale  production  has  been 
brought  to  its  highest  perfection.  In  1870  the  produc- 
tion of  pig  iron  employed  $56,145,000  in  capital  and 
27,000  wage  earners.  The  value  of  the  product  was 
$69,640,000  and  the  number  of  establishments  engaged 
in  the  industry  386.  While  there  was  a  steady  increase 
in  the  amount  of  capital  and  in  the  value  of  the  product, 
the  number  of  wage  earners  was  41,000  in  1880,  33,000 
in  1890,  and  39,000  in  1900,  and  38,429  in  1909.  Large 
scale  production  in  the  pig  iron  business  is  being  carried 
on  with  a  decreasing  amount  of  human  labor.  The  num- 
ber of  establishments  was  341  in  1880,  304  in  1890  and 
208  in  1909,  or  a  little  more  than  half  the  number  in 
1870.  The  capital  invested  was  $487,581,000,  or  nine 
times  the  amount  in  1870,  and  the  value  of  the  product 
was  $391,429,000,  or  five  and  one-half  times  1870. 


112  ECONOMICS 

Numerous  other  industries  which  have  developed 
large-scale  production  might  be  cited  to  show  a  decrease 
in  the  number  of  establishments,  and  a  small  increase  in 
the  number  of  wage  workers,  side  by  side  with  a  vast 
growth  in  capital  and  in  the  value  of  the  product. 

82.  Economies  of  large-scale  production. — The  cause 
of  the  wonderful  growth  of  large-scale  production  lies 
in  the  manifold  advantages  of  this  system  of  production 
over  that  which  it  displaced.  Large-scale  production 
makes  possible  a  fuU  utilization  of  the  benefits  arising 
from  the  division  of  labor. 

In  some  cases  it  is  only  possible  to  produce  cheaply 
if  the  division  of  labor  is  very  considerable.  Thus,  in 
the  departments  of  a  large  meat  packing  house,  division 
of  labor  is  carried  to  a  great  extreme,  each  man  in  turn 
performing  one  single  operation  on  the  animals,  fre- 
quently not  more  than  a  single  cut.  A  similar  policy 
is  followed  by  the  large  agricultural  implement  makers. 
In  the  boot  and  shoe  industry  there  is  both  highly  spe- 
cialized machinery  and  considerable  division  of  labor,  but 
the  fact  that  much  of  the  machinery  can  be  leased  from 
the  United  Shoe  Machinery  Company  for  a  rent  of  so 
much  per  pair  of  shoes  made,  enables  the  small  manufac- 
turer to  produce  under  conditions  almost  as  favorable  as 
the  large  one.  It  permits  the  economical  utilization  of 
expensive  machinery  and  equipment  which  the  small 
scale  producer  cannot  afford,  or  which  it  would  not  pay 
him  to  have  because  his  small  business  would  not  keep  it 
continuously  employed. 

In  industries  in  which  elaborate  and  expensive  ma- 
chinery is  required,  if  production  is  to  be  conducted 
economically,  there  is  no  place  for  the  small  concern. 
This  is  particularly  true  of  the  iron  and  steel  industries. 
The  minimum  capital  expenditure  for  the  equipment  of 


LARGE-SCALE  PRODUCTION  113 

blast  furnaces  is  high  but  in  addition  to  this  a  very  large 
outlay  can  be  incurred  in  providing  mechanical  facilities 
for  the  handling  of  the  heavy  raw  materials  and  finished 
products.  Some  of  these  mechanical  facilities  are 
essential  and  others  are  undoubtedly  economical,  though 
it  may  be  possible  to  establish  a  plant  on  a  paying  basis 
without  them. 

83.  Other  advantages  of  large-scale  production. — 
A  third  advantage  of  large-scale  production  is  in  con- 
nection with  the  purchase  of  materials  and  the  sale  of 
products.  Large-scale  producers  can  make  a  better  use 
of  by-products.  In  the  mineral  oil  and  the  meat  packing 
industries  large-scale  production  has  made  possible  the 
utilization  of  waste  products  to  an  extent  undreamed  of 
when  these  businesses  were  carried  on  by  small  concerns. 

A  fifth  advantage  is  found  in  the  large  expenditures 
which  a  large-scale  producer  is  able  to  make  in  experi- 
ments looking  to  the  improvement  of  the  technique  of 
production.  In  businesses  which  are  changing  their 
methods  continuously,  to  be  the  first  to  introduce  a  valu- 
able innovation  means  often  the  difference  between 
success  and  failure.  Many  of  the  manufacturing 
establishments  which  have  been  most  successful  in  the 
United  States  in  recent  years,  such  as  the  Carnegie  Steel 
Company  of  Pittsburgh,  have  owed  their  success,  in  no 
small  degree,  to  their  lavish  expenditures  on  industrial 
experiments,  and  to  the  installation  of  new  machinery 
as  soon  as  its  superiority  to  that  in  use  has  been  demon- 
strated. 

Running  through  all  these  various  economies  lies  the 
important  economy  of  reducing  the  cost  of  fixed 
charges  in  proportion  to  the  total  value  of  the  product. 
The  savings  to  be  effected  in  fixed  charges,  owing  to  an 
increase  in  the  scale  of  production,  are  by  no  means  negli- 

1-8 


114  ECONOMICS 

gible,  though  hardly  sufficient  by  themselves  to  render 
production  in  a  well-equipped,  though  small  factory, 
unremunerative.  It  is  chiefly  in  the  cost  of  buildings, 
power  and  superintendence  that  the  large  producer  can 
hope  to  save,  but  even  these  economies  appear  to  cease  at 
a  certain  point,  and  frequently  a  firm  will  build  and 
equip  two  or  three  moderate-sized  mills  rather  than  one 
very  large  one. 

84.  Essential  differences  between  large  and  small 
concerns. — In  almost  every  class  of  industry  there  are 
large  and  small  concerns,  and  the  important  point  to 
determine  is  in  what  way  they  differ  from  each  other. 
Generally  large  concerns  consist  of  a  combination  of 
small  undertakings,  either  similar  or  dissimilar.  Thus 
a  large  cotton  spinning  mill  with  100,000  spindles  is 
practically  the  equivalent  of  two  mills  with  50,000 
spindles  each.  In  this  case  the  large  concern  is  merely 
reduplicating  the  functions  of  a  small  concern,  and  if 
the  latter  is  conducted  on  a  scale  which  permits  of 
efficient  and  profitable  production,  any  small  savings  the 
former  may  effect  by  increasing  the  scale  of  production 
will  probably  be  counteracted  by  loss  occasioned  through 
the  absence  of  personal  supervision. 

On  the  other  hand,  a  large  meat  packing  factory  is  not 
a  mere  compilation  of  small  meat  packing  factories. 
The  former  itself  performs  several  functions  which  the 
latter  has  to  have  done  for  it.  Thus  the  big  packer 
does  a  great  deal  of  his  own  preliminary  subsidiary 
work;  recovers  sufficient  by-products  to  make  it  worth 
his  while  to  manufacture  them  into  finished  articles,  and 
establishes  an  elaborate  system  for  the  distribution  of 
his  products. 

85.  Broadening  the  scope  of  business  operations. — 
Frequently,  when  a  manufacturer  increases  the  size  of  his 


LAKGE-SCALE  PRODUCTION  115 

plant  there  appears  to  be  a  tendency  for  him  to  under- 
take new  functions.  In  this  way,  he  hopes  the  work  will 
be  done  better,  or  more  cheaply  or  both.  When  his 
scale  of  manufacturing  is  such  that  an  increased  per- 
formance of  one  function  is  not  hkely  to  lead  to  a  more 
than  nominal  increase  of  profits,  the  producer  is  likely  to 
turn  his  energies  in  other  directions,  and  in  particular 
to  undertake  commercial  functions,  as  it  is  almost  always 
possible  to  effect  economies  along  these  lines,  if  the 
manufacturer  produces  on  a  sufficiently  large  scale.  On 
the  one  hand,  he  hopes  to  reduce  the  cost  of  selling,  and 
on  the  other,  to  secure  a  safer  hold  on  the  market,  which 
may  lead  to  a  quasi-monopoly.  This  is  only  practicable 
when  the  goods  bear  a  trade-mark  or  are  made  up  in 
easily  distinguishable  packages,  and  are  always  sold 
under  a  particular  name.  If  the  manufacturer  obtains 
a  fairly  secure  hold  on  the  market,  he  may  be  able  to 
keep  up  prices,  should  the  cost  of  production  fall,  or  even 
raise  the  price,  if  he  cannot  increase  his  profits  in  any 
other  way.  This  latter  expedient,  however,  is  a  some- 
what risky  proceeding  and  may  lead  to  a  revulsion  of 
public  feeling  such  as  broke  up  the  English  soap  trust 
after  it  had  existed  three  weeks  in  the  autumn  of  1906. 
86.  Causes  of  the  development  of  large  scale  produc- 
tion.— It  now  remains  to  state  the  chief  causes  of  the 
development  of  large  scak.  production: 

1.  The  invention  of  machinery  and  mechanical  devices 
to  take  the  place  of  human  muscular  power. 

2.  The  application  of  steam  to  industry  is  an  essential 
part  of  the  development  of  inventions  and  mechanical 
appliances,  because  mechanical  appliances  would  be  use- 
less without  some  kind  of  power  to  drive  them.  In 
this  application  of  steam  to  industry  is  included  the  de- 
velopment of  the  steamboat  and  the  railroad  and  the 


116  ECONOMICS 

various  kinds  of  factory  machinery  which  have  played 
so  large  a  part  in  industrial  development. 

3.  The  development  of  labor  saving  machinery. 
While  falUng  more  or  less  under  the  first  two  headings, 
this  third  group  is  in  a  measure  distinctive  because, 
while  in  many  countries  power  is  applied  to  industry,  in 
no  country  perhaps  has  labor  saving  machinery  been 
so  highly  developed  as  in  the  United  States. 

4.  The  development  through  immigration  of  a  large 
unskilled  labor  force.  Great  numbers  of  immigrant 
laborers  began  to  come  to  the  United  States  in  the  middle 
of  the  Nineteenth  Century,  and  with  the  exception  of  a 
few  intermittent  periods,  immigrants  have  been  coming 
in  large  numbers  ever  since.  The  building  of  railroads, 
the  development  of  manufacturing,  in  fact,  the  growth 
of  most  American  industries  have  been  carried  on  by  this 
cheap  foreign  labor. 

All  of  these  factors  combined  have  developed  a 
transportation  system  without  which  the  large  scale  pro- 
duction of  the  country  would  be  impossible.  For 
example,  without  improved  methods  of  packing  and 
rapid  freight  transportation  it  would  be  impossible  to 
produce  the  meat  that  Chicago  sends  all  over  the  world. 
Without  cheap  transportation  the  fruit  grown  in  the 
West  would  not  be  sent  to  the  East  to  feed  the  manu- 
facturing population. 

Large-scale  production  is  dependent  for  its  existence 
primarily  upon  mechanical  power  and  mechanical 
ingenuity.  It  is  a  growth  in  business  organization  that 
owes  its  existence  to  the  presence  of  ingenuity  and  or- 
ganizing ability  in  the  labor  force. 

Modem  production  tends  to  become  concentrated  in  Targe 
establishments  for  the  reason  that  it  can  be  carried  on  most 


LARGE  SCALE  PRODUCTION  117 

economically  in  that  manner.     Large-scale  production  may  se- 
cure the  following  economies : 

1.  Economy  in  fixed  capital.  Modem  machinery  is  expen- 
sive, and  requires  expensive  factory  buildings.  Machine  pro- 
duction, therefore,  necessitates  a  very  large  outlay  for  fixed 
capital;  and  this  element  of  investment  tends  to  increase  each 
year.  The  statistics  just  presented  show  that,  in  the  United 
States,  the  average  amount  of  capital  invested  in  a  manufac- 
turing establishment  was  about  four  and  a  half  times  as  great 
in  1890  as  it  was  in  1850,  while  at  the  same  time  the  average 
number  of  laborers  employed  is  less  than  twice  as  large.  In 
the  textile  industries  they  show  that,  while  the  amount  of  capital 
invested  in  the  average  establishment  has  increased  to  five  times 
the  figures  for  1850,  the  average  number  of  laborers  employed 
has  increased  less  than  three  times.  In  the  iron  and  steel  indus- 
tries it  appears  that  the  average  investment,  of  capital  is  nearly 
four  times  as  large  as  it  was  thirty  years  ago,  while  the  average 
number  of  employes  is  only  two  and  one-half  times  as  large. 
It  is  evident,  therefore,  that  the  cost  of  fixed  capital  is  an  increas- 
ing element  in  the  cost  of  production.  Now  the  cost  of  the 
fixed  capital  often  does  not  increase  proportionately  as  the 
product  of  the  factory  increases.  For  this  reason  such  costs 
are  termed  the  "fixed  charges"  of  a  business,  since  within  certain 
limits  they  do  not  vary  much,  as  the  amount  of  business  is  larger 
or  smaller.  One  large  building  may  cost  less  than  two  small 
ones,  while  it  may  furnish  room  for  the  same  amount  of  machin- 
ery. Generally  a  smaller  expenditure  for  engines  and  other 
machinery  will  enable  one  large  factory  to  turn  out  as  large  a 
product  as  two  small  ones.  This  is  because  no  machine  is  need- 
lessly duplicated  in  the  large  factory,  while  in  the  two  smaller 
factories  some  of  the  machinery  may  be  only  half  utilized  for  a 
considerable  portion  of  the  time.  This  often  happens  when 
costly  machinery  is  required  to  perform  some  short  operation, 
and  would  remain  idle  much  of  each  day  in  a  small  factory  where 
the  product  is  not  large  enough  to  keep  the  machine  constantly 
employed.  Steam  railroads,  gas  and  electric-light  works,  and 
street  railways  are  the  most  common  illustrations  of  businesses 


118  ECONOMICS 

that  require  very  large  outlays  of  fixed  capital.  In  these  indus- 
tries one  company  can,  manifestly,  supply  the  same  territory 
with  very  much  less  unnecessary  reduplication  of  tracks,  gas 
pipes,  electric  wires,  etc.,  than  two  companies  would  require. 
But  the  same  thing  is  true,  although  sometimes  to  a  less  extent, 
of  giant  factories  in  which  hundreds  of  thousands  or  even  sev- 
eral millions  of  dollars  are  invested  in  land,  buildings,  and  ex- 
pensive machinery.  In  general,  it  may  be  said,  that  the  larger 
the  outlay  of  fixed  capital,  the  greater  are  the  economies  that 
result  from  the  concentration  of  production  in  a  small  number 
of  large  establishments.  If  the  annual  expenses  for  interest 
and  replacement  of  fixed  capital  are  $300,000  in  any  business, 
and  the  product  is  $1,000,000,  then  the  costs  of  the  fixed  capital 
will  be  thirty  cents  for  each  dollar  of  product.  Now  if  the 
output  of  the  business  be  increased  to  $1,500,000  by  merely 
utilizing  the  machinery  to  the  greatest  degree  possible,  then  the 
costs  of  the  fixed  capital  will  be  only  twenty  cents. 

2.  Economy  may  also  be  effected  in  the  circulating  capital. 
Less  coal  or  lubricating  oil  may  be  required  in  one  large  factory 
than  in  two  small  ones.  A  large  store  need  not  have  on  hand 
at  all  times  twice  the  stock  of  finished  products  that  two  small 
stores  may  require  in  order  to  enable  them  to  meet  any  probable 
demand  of  their  customers. 

3.  In  experimenting  with  new  methods  and  inventing  new  ma- 
chinery, a  large  concern  has  a  great  advantage  over  a  small 
one.  Invention  and  experiment  are  often  expensive  processes 
which  only  a  business  possessed  of  large  capital  can  aff^ord. 
Some  large  concerns  keep  scientists  and  inventors  at  work  en- 
deavoring to  improve  the  processes  by  which  production  is  car- 
ried on. 

4.  Large-scale  production  often  results  in  an  economy  of 
skill.  Labor  can  be  much  more  efficiently  subdivided  in  a  large 
business  undertaking.  Out  of  a  great  number  of  employes 
men  of  exceptional  talents  can  be  selected  for  the  particular 
lines  of  work  for  which  they  are  best  fitted.  A  high  specializa- 
tion of  work  and  a  greater  efficiency  in  the  application  of  labor 
can  be  secured  in  this  way.     Sometimes  an  absolute  saving  may 


LARGE-SCALE  PRODUCTION  119 

be  effected  in  the  amount  of  labor  required  to  do  the  same  work. 
It  is  said  that  a  steamer  of  two  hundred  or  three  hundred  tons' 
burden  needs  one  sailor  for  every  19.8  tons  of  cargo  carried, 
while  a  steamer  of  eight  hundred  to  one  thousand  tons  requires 
only  one  sailor  for  each  41.5  tons.  In  many  departments  of 
production  only  a  portion  of  the  raw  materials  can  be  used  for 
the  purpose  of  producing  the  main  products  of  each  business. 
A  considerable  part  of  the  raw  material  becomes  waste  unless 
some  means  can  be  found  to  utilize  it.  In  a  large  business  the 
amount  of  waste  material  is  very  great,  and  the  incentive  for 
saving  it  is  correspondingly  increased.  In  refining  petroleum, 
material  which  was  formerly  wasted  is  now  utilized  for  the  pro- 
duction of  lubricating  oil,  naphtha,  and  paraffine.  So  in  the 
business  of  beef  and  pork  packing,  a  more  complete  utilization 
of  every  part  of  the  animal  is  effected  in  large  establishments 
than  could  be  secured  in  any  other  way.  Hides,  hoofs,  horns, 
bones,  blood,  bristles,  hair,  are  utilized  in  the  production  of 
leather,  glue,  fertilizers,  etc. 

5.  Large  business  establishments  can  effect  savings  by  carry- 
ing on  for  themselves  allied  or  subsidiary  processes.  Large  oil 
refiners  make  their  own  barrels,  tin  cans,  tanks,  pumps,  sulphuric 
acid,  etc.  Large  sugar  refiners  import  their  own  raw  sugar,  own 
their  own  wharves  and  warehouses,  and  make  their  own  barrels 
and  boxes.  ^ 

1  C.  J.  Bullock,  "  Introduction  to  the  Study  of  Economics,"  pp.  178-181. 


PART  II:    EXCHANGE 

CHAPTER  I 

MEDIA  OF  EXCHANGE 

87.  Necessity  for  exchange. — ^We  have  seen  how  the 
efficiency  of  production  is  increased  by  the  division  of 
labor  and  the  specialization  of  employment.  The 
average  output  of  the  individuals — men,  women  and 
children — employed  in  the  manufacturing  industry  in 
the  United  States  in  1909  was  $3,125,  many  times  the 
value  of  the  commodities  which  could  have  been  pro- 
duced by  each  man  acting  for  himself,  and  singly  per- 
forming all  the  operations  which  are  now  parceled  out 
among  thousands  of  workers  scattered  all  over  the 
world. 

In  order  that  each  producer  should  be  able  to  confine 
himself  exclusively  to  one  pursuit,  that  he  should  be 
permitted  to  devote  his  entire  time  to  performing  one 
operation  out  of  a  long  series,  to  spend  his  days,  for 
example,  in  polishing  a  saw  or  vamping  a  shoe,  he  must 
be  able  to  exchange  the  product  of  his  labor  for  the  prod- 
ucts of  the  labor  of  others.  Everyone,  no  matter  how 
simple  his  existence,  needs  a  great  variety  of  com- 
modities. He  cannot  give  his  whole  strength  and  time  to 
making  horseshoes  or  axe  helves,  unless  he  can  in  some 
way  exchange  these  products  for  the  products  of  the 
labor  of  others.  This  the  organization  of  modern  in- 
dustrial society  enables  him  to  accomplish.  By  the  in- 
stitution of  exchange,  a  great  variety  of  occupations  and 

120 


MEDIA  OF  EXCHANGE  121 

industries  can  be  pursued  by  different  people,  at  differ- 
ent times  and  in  different  places,  each  one  giving  his 
undivided  attention  to  one  operation,  and  exchanging 
what  he  produces  for  the  manifold  products  and  services 
which  he  requires. 

88.  Two  forms  of  exchange. — Exchange  may  assume 
two  forms:  Direct  exchange,  which  is  called  barter, 
where  commodities  are  exchanged  each  for  every  other, 
as  shoes  for  cloth,  and  indirect  exchange  accomplished 
through  the  instrumentality  of  the  medium  of  exchange 
which  is  called  money. 

The  first  method,  although  employed  on  a  limited 
scale,  is  so  difficult  and  inconvenient  that  it  may  be  con- 
sidered entirely  unavailable.  The  inconvenience  of  bar- 
ter as  a  means  of  exchange  arises  from  the  lack  of 
coincidence  between  exchanges  which  it  involves.  The 
shoemaker  produces  three  pairs  of  shoes,  and  wishes  to 
buy  with  them  five  yards  of  cloth.  The  cloth  maker 
may  not  want  shoes  at  that  time,  and  in  consequence 
the  shoemaker's  demand  for  cloth  must  go  unsatis- 
fied. This  is  an  example  of  lack  of  coincidence  in  time. 
The  anthracite  coal  miners  use  a  large  amount  of  sugar, 
but  the  sugar  producers,  living  in  a  warm  country,  do 
not  need  fuel.  It  would  be  impossible,  therefore,  for 
this  need  of  the  miner  for  sugar  to  be  satisfied  by  the 
method  of  barter.  This  is  an  example  of  the  lack  of  co- 
incidence in  place.  The  silk  manufacturers  use  a  large 
amount  of  iron  and  steel  in  constructing  their  mills,  but 
the  f  amihes  of  the  operatives  in  iron  and  steel  mills  use 
only  a  small  amount  of  silk.  Here  is  a  lack  of  coinci- 
dence in  products. 

It  is  then  apparent  that  the  direct  method  of  ex- 
change, the  method  of  barter,  breaks  down  at  every 
point.     The   inconveniences    of   barter,    if   men   were 


122  ECONOMICS 

forced  to  resort  to  this  method,  would  be  so  great  as 
more  than  to  offset  all  the  advantages  to  be  derived 
from  the  division  of  labor.  Rather  than  rely  upon 
barter,  with  its  enormous  loss  of  time,  to  supply  him, 
in  exchange  for  the  results  of  his  own  labor,  with  the 
products  of  the  labor  of  others,  every  man  would  prefer 
to  make  everything  which  he  needed  for  himself.  Di- 
vision of  labor,  in  other  words,  if  barter  were  the  only 
device  open  to  exchangers,  would  be  impossible. 

89.  Medium  of  exchange. — The  inconvenience  of 
barter,  at  an  early  period  of  civilization  led  to  the  intro- 
duction of  a  medium  of  exchange.  It  was  early  dis- 
covered that  some  commodity,  such  as  cattle  or  sheep 
or  iron,  was  in  universal  demand;  that  every  producer 
needed  this  commodity  at  all  times  and  was  willing  to 
give  something  in  exchange  for  it.  It,  therefore,  came 
about,  in  every  country  where  exchanges  were  carried 
on,  that  some  one  commodity  was  fixed  upon  as  the 
medium  of  exchange ;  i.  e.,  as  the  good  for  which  every 
one  was  willing  to  give  that  which  he  had  for  sale, 
because  he  knew  that  he  could,  in  his  turn,  pass  this  com- 
modity on  to  other  producers  in  exchange  for  their 
products  and  services  which  he  might  require.  By  the 
selection  of  a  medium  of  exchange  the  inconveniences 
of  barter  were  entirely  avoided.  Every  one  exchanged 
his  goods  for  the  medium  of  exchange,  and  he  kept  this 
by  him  until  he  should  have  occasion  to  purchase  some- 
thing from  another.  The  seconid  party  would  in  his  turn 
gladly  receive  the  commodity  which  was  in  universal 
demand,  not  to  consume  it  himself,  but  to  pass  it  on  to 
others  in  further  exchanges.  The  functions  of  money 
in  exchange  are  as  follows:  Money  serves  as  (1)  a 
medium  of  exchange;  (2)  a  common  denominator  of 
values,  all  commodities  being  placed  on  a  basis  by  which 


• 


MEDIA  OF  EXCHANGE  123 

their  value  can  be  compared,  by  expressing  them  in 
terms  of  money;  (3)  a  store  of  value;  (4)  a  standard 
of  deferred  payments  by  which  is  meant  that  loan  con- 
tracts are  drawn  in  terms  of  money. 

90.  Commodities  used  as  medium  of  exchange. — 
Many  things  have  been  used  as  money  in  different 
stages  of  civilization.  Among  savage  tribes,  the  skins 
of  animals  have  frequently  served  as  money;  among 
fishing  tribes,  dried  fish  formed  the  medium  of  ex- 
change; among  pastoral  peoples,  flocks  and  herds  fur- 
nished that  which  best  served  as  money.  The  early 
Latin  tribes  counted  their  cattle  by  the  head  (per  cap- 
ita) and  from  this  is  derived  the  modern  expression 
"capital."  In  agricultural  communities,  wheat,  maize, 
cocoanuts  and  tea  have  at  diff'erent  times  served  as  the 
medium  of  exchange.  All  these  commodities  con- 
formed to  some  of  the  requirements  of  a  good  medium 
of  exchange;  they  all  existed  in  sufficient  quantities  to 
enable  them  to  serve  this  purpose,  and  they  were  uni- 
versally acceptable  in  the  places  where  they  were  used. 
They  had,  however,  certain  drawbacks  which  rendered 
them  unavailable  in  a  society  where  a  large  amount  of 
exchanging  was  carried  on. 

91.  Characteristics'  of  a  medium  of  exchange. — A 
conmiodity  to  serve  as  money  must  not  only  exist  in 
large  quantities,  and  be  in  universal  demand,  but  it 
must  admit  of  division  into  units.  A  great  variety  of 
commodities  will  be  off*ered  in  exchange  for  the  medium 
of  exchange — wheat,  corn,  eggs,  cattle,  iron,  etc. 
These  commodities  are  of  diff'erent  weights  and  values. 
The  medium  of  exchange  must  be  able  to  accommodate 
itself  to  the  great  variety  of  conditions  which  is  here 
presented.  A  man  must  be  able  to  exchange  a  dozen 
eggs  for  the  medium  of  exchange,  and  he  must  be  able 


124  ECONOMICS 

to  exchange  his  farm  or  his  house  for  the  same  com- 
modity. Furthermore,  the  commodity  which  serves  as 
the  medium  of  exchange,  which  we  will  hereafter  term 
"the  money  commodity,"  must  be  uniform  in  quality 
so  that  everyone  can  be  able  to  estimate  the  value  of 
that  which  he  has,  in  terms  of  the  money  commodity. 
The  money  commodity  must  likewise  be  durable,  so  as 
to  protect  it  from  decay.  Finally,  the  money  com- 
modity must  be  portable,  that  is  to  say,  it  must  unite 
large  value  with  small  bulk  so  that  it  can  be  carried 
about  and  used  for  exchanges  in  different  places. 

As  a  result  of  the  experience  of  mankind,  it  has  been 
found  that  the  precious  metals  are  best  qualified  to 
serve  as  money,  and  gold  and  silver  have  come  gradually 
into  universal  use.  Under  modern  conditions,  these 
metals  are  much  better  adapted  to  serve  as  money  than 
any  other  material.  They  are  universally  acceptable, 
they  are  uniform  in  quality,  and  they  can  be  accurately 
divided  into  pieces  of  desired  size;  they  are  durable, 
they  unite  great  value  in  small  bulk  and  a  large  quan- 
tity of  them  is  in  existence.  Gold  and  silver,  further- 
more, can  be  manufactured  into  coins — pieces  of  metal 
shaped  and  stamped — so  as  to  prevent  counterfeiting 
and  to  give  the  certification  of  the  government  as  to 
their  weight  and  fineness. 


CHAPTER  II 

MONEY  SYSTEM  OF  THE  UNITED  STATES 

92.  The  unit  of  value. — Passing  now  from  the  gen- 
eral discussion  of  money,  let  us  consider  in  more  detail 
the  monetary  system  of  the  United  States — ^the  medium 
of  exchange  that  the  American  people  use  in  their  trans- 
actions. The  basis  of  the  American  monetary  system 
is  the  dollar.  In  England  the  money  unit  is  known 
as  the  pound  sterling;  in  Austria  it  is  the  crown;  in 
Russia  it  is  the  ruble;  in  Italy  it  is  the  lira;  in  Spain 
it  is  the  peseta ;  in  France  it  is  the  franc ;  in  Germany, 
the  mark.  Each  one  of  these  terms  signifies  a  certain 
weight  of  gold  or  silver.  In  the  Unit^.1  States  the 
dollar  is  23.22  grains  of  fine  gold,  formed  into  a  coin 
and  stamped  in  a  particular  manner  in  the  government 
mint.  This  dollar  is  the  unit  of  value  in  our  monetary 
system.  Everyone  who  has  anything  to  sell  exchanges 
his  products  for  dollars.  He  thinks  of  the  value  of  these 
commodities  in  terms  of  dollars.  The  object  of  every 
man  in  business  is  to  accumulate  as  large  an  amount  of 
property  expressed  in  terms  of  dollars  as  is  possible. 
The  entire  business  thinking  of  the  United  States  is  done 
in  terms  of  this  monetary  unit. 

93.  Kinds  of  American  money. — ^Besides  the  gold 
dollar,  however,  there  are  many  other  kinds  of  money 
in  the  United  States.  There  are  four  kinds  of  gold  coin ; 
the  two-dollar-and-a-half  piece,  the  $5  piece,  the  $10 
piece,  and  the  $20  piece.  The  $20  piece  contains  twenty 
times  the  weight  of  gold  contained  in  the  dollar ;  the  $5 

125 


126  ECONOMICS 

piece,  five  times;  and  the  quarter  eagle,  or  $2.50,  con- 
tains two  and  one-half  times  the  amount  of  gold  con- 
tained in  the  dollar.  We  have  also  in  our  monetary- 
system  several  silver  coins — the  silver  dollar,  the  half- 
dollar,  the  quarter  and  the  dime;  and  we  have  minor 
coins,  such  as  nickels  and  pennies,  which  are  convenient 
along  with  the  smaller  silver  coins  in  making  change. 

Besides,  there  is  in  circulation  a  large  amount  of 
paper  money,  known  as  the  gold  certificate,  the  silver 
certificate,  the  United  States  note  or  greenback,  the  na- 
tional bank  note,  and  the  Federal  Reserve  bank  note 
issued  in  denominations  of  one  dollar,  two  dollars,  five, 
ten,  twenty,  fifty,  one  hundred,  and  (gold  certificates) 
five  hundred,  one  thousand,  five  thousand,  ten  thousand. 

Each  of  these  paper  certificates  is  an  express  or  im- 
plied promise  of  the  government  or  of  some  bank  backed 
up  by  the  government,  to  deliver  to  the  bearer  the  num- 
ber of  dollars,  i.  e.,  gold  dollars — ^which  is  named  in 
the  certificate.  For  our  present  purpose,  it  is  of  no 
importance  to  distinguish  between  the  various  kinds  of 
paper  money,  except  to  point  out,  as  already  suggested 
above,  that  paper  money  in  the  United  States  may  be 
divided  into  two  classes :  ( 1 )  Certificates  issued  by  the 
government  and  calling  for  redemption  in  metallic 
money,  either  gold  or  silver,  the  silver  being  also  re- 
deemable in  gold,  and  (2)  certificates  issued  by  banks 
and  calling  for  payment  in  any  kind  of  lawful  money 
of  the  United  States. 

94.  The  equal  value  of  paper  money  and  coin. — 
Leaving  the  further  analysis  of  our  monetary  system 
for  a  later  stage  of  the  discussion,  it  is  important  now 
to  observe  what  has  come  within  the  observation  of 
everyone,  that  all  parts  of  our  monetary  system  are  of 
equal  value;  that  in  common  practice  no  greater  im- 


THE  MONEY  SYSTEM  127 

portance  is  attached  to  gold  than  to  silver,  and  no 
greater  importance  to  silver  than  to  paper.  In  fact, 
the  average  business  man  objects  to  gold  and  silver 
coins.  They  are  inconvenient  to  carry  about  and  awk- 
ward to  handle.  He  prefers  some  kind  of  paper  money. 
It  is  evident,  however,  that  the  paper  in  itself  has  no 
value,  and  it  should  further  be  remarked  that  the  silver 
dollars  which  are  taken  equally  with  gold  and  which,  in 
fact,  are  more  frequently  met  with  in  common  circula- 
tion, are  worth  as  bullion  less  than  half  of  the  value 
which  is  expressed  upon  their  faces.  In  view  of  this 
fact,  it  is  necessary  to  explain  the  universal  accepta- 
bility of  these  paper  certificates,  which  form  the  ordi- 
nary currency  of  the  American  people. 

The  explanation  is  simple ;  Paper  money  is  taken  as 
equivalent  to  gold  because  for  all  practical  purposes 
it  is  equivalent  to  gold.  By  going  through  certain  for- 
malities every  paper  dollar  now  in  existence  in  the 
United  States  can  be  exchanged  for  gold  coins.  The 
government,  when  application  is  made,  will  redeem  any 
one  of  its  promises  to  pay  gold,  according  to  the  terms 
of  the  promise.  There  is,  therefore,  a  universal  con- 
fidence, although  this  confidence  is  not  probably  present 
in  the  minds  of  many  exchangers  at  any  given  time, 
in  the  willingness  and  the  ability  of  the  government  to 
maintain,  through  this  process  of  redemption,  all  forms 
of  paper  money  at  par  with  gold. 

95.  Government  guarantees. — The  government  also 
undertakes  to  maintain  the  national  bank  notes,  familiar 
to  us  as  five  and  ten  dollar  bills,  on  an  equality  with 
gold.  Every  bank  is,  as  stated  above,  required  to  re- 
deem its  notes  at  its  counter  in  lawful  money  of  the 
United  States,  and  lest  the  bank  should  become  insol- 
vent and  unable  to  meet  its  obligations,  the  government 


128  ECONOMICS 

has  on  deposit  at  Washington  an  amount  of  govern- 
ment bonds  equal  to  the  amount  of  national  bank  notes 
outstanding  in  the  hands  of  the  people.  If  any  bank 
fails  to  redeem  its  notes,  the  Treasury  Department  will 
sell  these  bonds  and  make  the  redemption. 

The  people  have  confidence  in  the  ability  and  willing- 
ness of  the  government  to  keep  all  kinds  of  money 
which  it  issues  at  par  with  gold  for  three  reasons :  ( 1 ) 
Because  the  government  has  publicly  declared  its  inten- 
tion to  redeem  its  promises  to  pay  gold,  according  to 
the  terms  of  the  promise,  and  because  this  redemp- 
tion is  actually  going  on  at  all  times;  (2)  because  the 
government  keeps  in  its  vaults  a  reserve  of  gold  coin 
and  bullion  which  is  never  allowed  to  fall  below  $150,- 
000,000.  This  is  the  visible  evidence  and  support  of  the 
government's  guarantee  of  redemption;  (3)  because 
the  people  know  that  in  case  their  reserve  should  prove 
insufficient  to  redeem  the  paper  it  has  presented  for 
redemption,  the  government  may  obtain,  through  its 
borrowing  power,  any  quantity  of  gold  which  may  be 
needed.  During  the  second  administration  of  Presi- 
dent Cleveland,  $262,000,000  of  government  bonds 
were  sold  in  order  to  obtain  the  means  of  redemption. 
On  the  basis  of  this  confidence  in  the  willingness  and 
the  ability  of  the  government  to  make  good  its  prom- 
ises, the  stability  of  our  monetary  system  rests  and  by 
it  the  equal  acceptance  of  all  kinds  of  money  by  every 
exchanger  is  assured. 

96.  Bi-metalism. — In  the  United  States,  the  basis 
of  the  monetary  system  is  the  standard  dollar,  composed 
of  23.22  grains  of  gold.  This  is  the  money  of  ultimate 
redemption.  Until  1873  the  dollar  was  either  23.22 
grains  of  gold  or  371^  grains  of  silver.  Until  1873, 
the  United  States  Mint  could  coin  either  23. 22  grains 


THE  MONEY  SYSTEM  129 

of  gold  or  371%  grains  of  silver  into  a  piece  of  money 
which  would  be  called  a  dollar.  The  law  of  the  United 
States  provided  that  the  creditor  must  accept  either  gold 
or  silver  dollars  in  payment  of  his  obligation.  This 
was  what  is  called  the  double  or  bi-metallic  standard. 
At  different  times,  it  has  prevailed  in  every  civilized 
country.  This  double  standard  may,  however,  be  an 
alternating  standard. 

The  precious  metals  have  two  uses,  first  as  bullion 
in  the  arts,  and  second  as  coin.  Their  bullion  value  is 
regulated  by  the  market,  their  legal  ratio  by  law. 
When  one  ounce  of  gold  exchanges  in  the  market  for 
seventeen  or  eighteen  ounces  of  silver  there  is  an  in- 
ducement to  buy  silver  for  coinage  and  to  melt  down 
gold  coin  for  sale  in  the  bullion  market.  The  supply 
of  silver  for  the  bullion  market  is,  therefore,  decreased 
and  the  supply  of  gold  increased.  If  the  increased  de- 
mand for  silver  for  coinage  purposes  and  the  increased 
supply  of  gold  for  the  arts,  at  such  a  time,  lowers  the 
value  of  gold  and  raises  the  value  of  silver  until  the 
legal  and  market  ratio  again  correspond,  before  gold 
has  all  been  withdrawn  from  circulation,  the  double 
standard  will  be  maintained,  gold  and  silver  circulating 
together.  If  all  the  gold  retires  from  circulation,  how- 
ever, without  restoring  the  legal  ratio,  the  country  in 
which  this  takes  place  will  be  on  a  silver  basis. 

97.  Abandonment  of  the  double  standard. — The 
double  standard  was  maintained  in  most  European 
countries  until  after  1871.  England  had  adopted  the 
gold  standard  in  1816.  In  1871,  however,  Germany 
ceased  to  coin  silver  as  standard  money;  silver  thalers 
were  still  coined,  but  they  were  limited  in  amount  by 
the  government  and  they  were  redeemed  in  gold.  The 
action  of  Germany  was  followed  by  most  of  the  other 

1—9 


130  ECONOMICS 

European  nations.  In  1873  also  the  United  States 
dropped  the  silver  dollar  from  the  list  of  standard  coins, 
and  in  spite  of  a  violent  political  agitation  lasting  from 
1876  to  1896,  which  resulted  in  the  purchase  and  coin- 
age of  a  vast  amount  of  silver  token  coins,  the  gold 
standard  of  redemption  has  been  maintained.  The 
money  question  is  no  longer  a  subject  of  political  con- 
troversy. 

The  effect  of  this  general  refusal  of  the  civilized 
world  to  longer  coin  silver  at  a  fixed  ratio  with  gold 
when  presented  at  the  Mint  was  to  change  from  the 
double  standard,  so-called,  to  the  single  gold  standard. 
The  effect  of  this  general  rejection  of  silver  was  to 
lessen  the  demand  for  silver  which  in  time  resulted  in 
a  dechne  of  50  per  cent  in  its  price.  Bi-metallism, 
properly  speaking,  no  longer  exists.  A  few  nations, 
China  being  the  most  important,  still  adhere  to  the  sil- 
ver standard.  It  is  expected  that  before  many  years 
the  entire  world  will  have  adopted  gold  as  a  basis  for 
its  monetary  system. 

98.  Inconvertible  paper. — When  these  paper  prom- 
ises to  pay  money  are  redeemed  according  to  the  terms 
of  the  promises,  the  paper  money  is  called  convertible. 
When  redemption  is  refused,  however,  the  paper 
is  called  inconvertible  paper.  It  has  frequently  hap- 
pened that  in  order  to  obtain  a  forced  loan  without 
interest  from  the  public,  governments  have  issued 
promises  to  pay  in  the  form  of  paper  money  without 
making  any  provision  to  redeem  the  promise.  The 
money  is  accepted  by  the  public  and  commodities  and 
services  are  given  in  exchange  for  it.  The  only  expense 
in  putting  it  out  is  the  expense  of  the  paper  and  print- 
ing, and  it  has  been  considered  by  some  persons  as  a 
most  economic  method  of  raising  funds. 


THE  MONEY  SYSTEM  131 

When  paper  money  is  inconvertible,  it  usually  circu- 
lates at  a  discount,  the  amount  of  discount  depending 
upon  the  number  of  notes  outstanding  and  the  pros- 
pects for  their  redemption  according  to  the  terms  of 
the  promise.  The  ejffect  of  this  fall  in  the  value  of 
money  is  to  raise  prices,  and,  as  the  conditions  affect- 
ing this  value  are  constantly  changing,  the  valuation 
of  money  and  the  prices  of  commodities  under  a  system 
of  inconvertible  paper  are  subject  to  incessant  fluctua- 
tions. The  result  of  these  fluctuations  is  to  disturb 
business  and,  therefore,  because  it  makes  all  future  cal- 
culations uncertain,  inconvertible  paper  money  increases 
the  risk  and  hazard  of  commercial  operations.  If  these 
notes  are  made  legal  tender,  which  usually  happens; 
that  is  to  say,  if  the  creditor  is  required  by  law  to  ac- 
cept them  in  payment,  the  effect  of  the  inevitable  fall 
in  the  gold  value  of  the  paper  money  will  be  to  inflict 
heavy  losses  upon  the  creditor  who  may  have  loaned 
money  before  the  issue  of  the  inconvertible  paper. 
Working  men  also  suff'er  from  its  issue,  because  their 
wages  change  slowly  while  the  prices  of  that  which 
they  buy  rapidly  advance.  In  other  words,  the  purchas- 
ing power  of  wages  declines. 

Foreign  commerce  is  also  disturbed  by  the  issue  of 
inconvertible  paper  and  sellers  must  first  establish 
prices  in  gold  and  silver  which  are  out  of  circulation, 
because  although  they  are  worth  no  more  than  paper 
for  debt-paying  purposes,  they  are  worth  much  more 
as  bullion.  After  making  this  double  calculation,  the 
man  engaged  in  foreign  trade  must  then  find  out  what 
gold  and  silver  are  worth  in  paper,  since  the  value  of 
paper  is  constantly  changing.  The  result  of  this  cal- 
culation is  always  uncertain,  and  this  seriously  inter- 
feres with  foreign  commerce. 


132  ECONOMICS 

99.  Paper  money  issues  during  the  Civil  War. — All 
the  effects  of  inconvertible  paper  which  have  been  men- 
tioned were  experienced  by  the  United  States  during 
and  after  the  Civil  War.  In  order  to  obtain  funds  for 
the  payment  of  the  troops,  paper  money  was  first  issued, 
as  a  war  measure,  in  1862.  Gold  immediately  disap- 
peared from  circulation  because  these  promises  to  pay 
gold  were  not  redeemed  according  to  the  terms  of  the 
promise,  and  no  one  would  give  gold  in  exchange  for 
them,  if  the  government  refused  to  do  this.  The  coun- 
try was  on  a  paper  basis  until  1879.  The  value  of  the 
dollar  as  a  result  of  the  general  uncertainty  as  to  re- 
demption and  in  part,  also,  of  the  successive  issues 
which  raised  the  amount  outstanding  at  one  time  to 
nearly  $500,000,000  fell  in  1864  below  forty  cents  in 
gold. 

The  results  of  this  issue  of  depreciated  paper  are  now 
generally  admitted  to  have  been  bad  and  the  issue  itself 
unnecessary.  Prices  rose  to  enormous  figures,  and  bus- 
iness was  carried  on  under  highly  speculative  condi- 
tions, the  value  of  the  wages  of  workingmen  ar^d 
soldiers  was  seriously  reduced,  and  foreign  trade  was 
greatly  disturbed. 

In  1876,  after  a  bill  providing  for  an  indefinite  con- 
tinuation of  the  system  of  issuing  paper  had  been 
yetoed  by  President  Grant,  Congress  passed  a  law  that 
on  January  1,  1879,  all  paper  should  be  redeemed  in 
gold,  and  authorizing  the  Secretary  of  the  Treasury 
to  collect  a  fund  of  gold  for  this  purpose.  In  accord- 
ance with  the  act  of  Congress,  Secretary  Sherman  col- 
lected a  large  redemption  fund,  and  on  the  date  specified 
redemption  or  "resumption"  as  it  was  called,  was  suc- 
cessfully accomplished.  Since  that  time  paper  money 
has  been  kept  at  par  with  gold. 


^ 


CHAPTER  III 


CREDIT 


100.  Credit  defined. — It  cannot  have  escaped  the  ob- 
servation of  every  one  who  has  had  money  to  pay  or  to 
receive,  that  the  amount  of  actual  cash  which  comes  into 
his  hands  is  very  much  less  than  the  amount  of  money 
which  is  represented  by  the  bank  checks  and  drafts 
which  he  receives.  Every  business  man  knows  from 
his  experience  that  probably  nine-tenths,  or  at  any  rate  a 
large  proportion  of  his  purchases  and  sales,  are  made  by 
the  use  of  these  so-called  "credit  instruments."  Some 
large  business  concerns  never  receive  or  pay  a  dollar  in 
cash.  It  is,  therefore,  necessary  in  concluding  our  dis- 
cussion of  the  media  of  exchange  to  take  account  of 
credit — the  most  important  element. 

Credit  may  be  defined  as  a  promise  or  contract  to 
pay  money  on  demand  or  at  a  future  time.  This  prom- 
ise takes  various  forms.  A  promissory  note  is  perhaps 
more  familiar  to  the  average  man  than-  any  other  form 
of  credit.  An  accepted  draft  is  another  form;  a  book 
account  is  a  third,  and  a  bank  deposit  is  a  fourth. 
These  promises  to  pay  money  are  given  in  exchange 
either  for  commodities,  as  when  a  man  buys  a  horse 
and  gives  his  note  for  sixty  days  for  the  purchase  price, 
or  where  a  farmer  sells  his  cattle  to  a  commission  house 
and  draws  a  draft  upon  the  purchaser,  instructing  him 
to  pay  to  a  third  party  the  amount  due.  Or  these  prom- 
ises to  pay  money  may  be  given  in  exchange  for  money, 
as  where  a  manufacturer  borrows  $10,000  to  pay  wages 

133 


134.  ECONOMICS 

and  gives  his  note  at  three  months  to  the  lender  to 
secure  the  return  of  the  money.  The  most  universal 
kind  of  credit,  however,  although  a  form  least  under- 
stood by  the  average  man,  is  bank  credit,  which  is  rep- 
resented by  bank  deposits. 

101.  Functions  of  a  bank. — A  bank  is  an  institution 
engaged  in  the  safe  keeping  of  money  and  other  val- 
uables, in  transmitting  funds  from  one  place  to  another, 
in  making  loans  and  in  buying  promises  to  pay  money 
in  exchange  either  for  money  or  for  its  own  promise 
to  pay  money.  These  are  the  important  functions  of 
a  bank,  although  the  banker  performs  many  other  serv- 
ices to  the  community. 

The  first  two  functions  above  mentioned  need  not 
detain  us.  They  are  familiar  to  every  one.  Few  peo- 
ple now  keep  much  cash  on  hand,  and  most  people,  in 
addition  to  putting  their  money  into  a  bank  for  safe 
keeping,  also  entrust  the  bankers  with  the  custody  of 
other  valuable  property,  such  as  jewels  and  plate. 

The  third  function  of  a  bank,  however,  although  most 
important,  is  least  understood.  The  business  of  the 
banker,  in  common  language,  is  to  lend  money.  The 
process  of  lending  is  simple.  A  man  wishes  to  borrow 
$1,000  for  use  in  his  business.  He  makes  out  his  note 
at  three  months  for  that  amount,  endorsed,  that  is  guar- 
anteed, by  some  other  responsible  person  known  to  the 
banker,  and  he  takes  this  to  the  bank  to  be  discounted. 
If  the  rate  of  interest  is  6  per  cent,  the  bank  will  buy 
this  note  from  him  for  $985,  deducting  6  per  cent 
interest  for  three  months  from  the  face  of  the  note. 
The  note  is  now  the  property  of  the  banker,  and  he 
has  given  in  exchange  for  it,  to  the  borrower,  the  right 
to  call  upon  him  at  any  time  for  $985.  This  operation 
is  called  lending  money;  in  reality  it  is  the  purchase 


CREDIT  135 

by  the  bank  of  a  promise  to  pay  money.  The  borrower 
may  now  do  one  of  two  things;  he  may  either  write 
out  a  check  for  $985,  payable  to  himself,  step  to  the 
paying-teller's  window  and  draw  out  the  money,  or 
he  may  leave  the  money  on  deposit.  As  a  depositor, 
he  becomes  the  creditor  of  the  bank.  The  bank  is 
hable  to  him  for  the  payment  of  $985  on  demand.  On 
the  other  hand,  the  bank  is  his  creditor  for  $1,000.  He 
is  liable  to  the  bank,  three  months  from  the  date  of  the 
loan,  for  the  payment  of  that  amount. 

In  all  probability  our  borrower  will  take  the  second 
course.  He  will  not  draw  out  the  money,  but  will  take 
a  check-book  instead.  By  means  of  checks,  which  are 
orders  upon  the  bank  signed  by  himself  to  pay  to  cer- 
tain other  persons  or  to  himself  the  amount  of  money 
named  in  the  orders,  the  borrower  can  at  any  time  draw 
out  such  part  of  his  balance  as  he  needs,  and  can  also 
make  payments  to  others  by  transferring  to  them  his 
right  to  receive  money  on  demand  from  the  bank. 
These  checks  are  readily  accepted  in  satisfaction  for 
claims  by  those  who  do  business  with  him,  provided 
they  know  that  he  is  responsible  and  would  not  draw 
checks  for  a  larger  amount  than  his  bank  balance. 

The  creditors  of  the  borrower  are  not  obliged  to  re- 
ceive his  checks  in  payment.  Checks  are  not  legal 
tender.  If  his  creditors  insisted  upon  it,  he  would  be 
obliged  to  go  to  the  bank,  draw  out  the  money  and 
make  his  payments  in  that  form.  As  a  matter  of  com- 
mon convenience,  however,  checks  are  universally  ac- 
cepted by  business  men  in  payment  for  every  descrip- 
tion of  claim. 

102.  Checks  as  a  medium  of  exchange. — These  checks, 
as  remarked  above,  constitute  the  principal  medium  of 
exchange  in  the  United  States.     Nearly  all  buying  and 


136  ECONOMICS 

selling  is  done  in  this  way.  All  large  transactions  are 
accomplished  by  the  use  of  checks.  The  largest  check 
ever  drawn  was  that  drawn  by  the  Secretary  of  the 
Treasury  for  $40,000,000  in  favor  of  the  stockholders 
in  the  Panama  Canal  Company  to  pay  for  their  prop- 
erty and  rights  that  they  had  transferred  to  the  United 
States.  During  1912,  the  exchanges  of  checks  reported 
as  passing  through  bank  clearing  houses  in  the  United 
States  was  $174,926,921,000.  They  are  the  ahnost  uni- 
versal medium  of  exchange. 

The  result  of  this  general  use  of  credit  instruments 
in  making  payments  is  that  the  bank  is  able  to  sell  a 
much  larger  amount  of  promises  to  pay  money  in  the 
form  of  bank  deposits  than  the  amount  of  money  which, 
at  any  given  time,  it  has  on  hand  to  redeem  its  promises. 
This  may  be  best  understood  from  a  concrete  example. 

Mr.  John  Smith  is  a  miller  in  Minneapolis.  He  has 
bought  at  70  cents  a  bushel  100,000  bushels  of  grain 
from  William  Brown,  a  grain  dealer  of  Fargo.  Mr. 
John  Smith  has  a  bank  deposit  in  the  First  National 
Bank  of  Minneapolis  of  $100,000,  that  is  to  say,  the 
First  National  Bank  has  given  to  him  the  right  to 
draw  against  it  at  any  time  for  that  amount.  He 
owes  $70,000  in  payment  for  his  wheat,  and  he  sends 
a  check  for  this  amount  to  Mr.  Brown  at  Fargo.  Mr. 
Brown  is  now  entitled  to  have  $70,000  of  the  deposit  of 
the  $100,000  standing  to  the  credit  of  Mr.  Smith  on 
the  books  of  the  First  National  Bank  of  Minneapolis, 
transferred  to  his  own  credit.  If  he  should  go  to 
Minneapolis,  present  this  check  to  the  paying-teller  of 
the  First  National  Bank  and  be  properly  identified,  the 
teller  would  pay  to  him  $70,000  in  currency  which  he 
could  carry  away  with  him  or  otherwise  dispose  of. 


CREDIT 


137 


Business,  however,  is  not  transacted  in  this  way.  If 
Mr.  Brown  had  an  account  in  the  Minneapohs  bank 
he  would  deposit  the  check  to  his  credit.  He  has,  how- 
ever, no  account  in  this  bank,  and  he  therefore  deposits 
the  Minneapohs  check  with  his  own  bank,  the  Fargo 
National  Bank,  for  collection.  The  Fargo  bank  gives 
him  credit  on  its  books  for  $70,000,  which  entitles  him 
to  receive  that  amount  on  demand,  in  return  for  an 
order  drawn  by  Mr.  John  Smith  of  Minneapolis  in 
favor  of  Mr.  WilHam  Brown  of  Fargo  and  endorsed, 
that  is,  signed  over  to  the  Fargo  National  Bank  by  the 
latter.  The  Fargo  Bank  now  sends  this  check  to  its 
correspondent  in  Minneapolis  to  collect  from  the  First 
National  Bank. 

103.  J'he  clearing  house. — While  these  transactions 
are  going  forward,  Fargo  merchants  who  deal  exten- 
sively with  Minneapolis,  have  bought  coal  and  other 
supplies  from  Minneapolis,  and  they  have  paid  their 
Minneapolis  correspondents  by  checks  on  the  Fargo 
National  Bank.  The  Minneapolis  dealers,  we  will  sup- 
pose, are  all  depositors  with  the  First  National  Bank 
of  that  city.  They  deposit  these  checks,  which  may 
aggregate  $80,000  in  amount,  with  the  First  National 
Bank.  These  checks  are  now  cleared,  that  is  to  say, 
offset  against  each  other  through  the  Minneapolis 
Clearing  House.  At  ten  o'clock  every  morning  all  the 
banks  of  ^linneapolis  send  to  this  institution,  which 
they  maintain  for  the  purpose,  all  the  checks,  drafts 
and  bills  of  exchange  drawn  upon  other  banks  which 
have  come  into  their  hands  during  the  last  twenty-four 
hours.  Suppose  there  are  twenty  banks  in  the  Clear- 
ing House.  Each  one  of  these  banks  will  have  claims 
against  every  other  bank,  either  on  account  of  checks 


138 


ECONOMICS 


deposited  with  it  against  these  other  banks,  or  against 
banks  for  which  these  other  banks  act  as  correspondents. 
These  claims  are  now  offset  against  each  other. 

We  can  understand  this  best  by  continuing  our  illus- 
tration: The  First  INTational  Bank  of  Minneapolis 
takes  to  the  Clearing  House  $500,000  in  checks  against 
other  Minneapolis  banks.  Among  these  checks  are 
those  for  $80,000  sent  from  Fargo  and  deposited  with 
the  First  National.  Every  other  bank  in  Minneapolis 
brings  to  the  Clearing  House  checks  and  other  claims 
against  the  First  National  Bank  for  $490,000.  Among 
these  claims,  is  the  check  for  $70,000  drawn  by  John 
Smith  in  favor  of  William  Brown,  of  Fargo,  North 
Dakota,  deposited  by  William  Brown  in  the  Fargo 
National  Bank  and  sent  by  the  Fargo  National  Bank 
to  its  Minneapolis  correspondent.  Here  then  is  the 
situation:  The  First  National  Bank  owes  to  all  the 
other  banks  of  Minneapolis  $490,000;  the  other  banks 
owe  the  First  National  $500,000.  These  claims  will 
be  liquidated  or  cleared,  as  between  the  First  Na- 
tional and  the  other  members  of  the  Clearing  House, 
by  the  paying  of  $10,000  by  the  other  banks  to  the 
First  National.  The  same  may  be  said  of  every  other 
member  of  the  Clearing  House.  Every  bank  reports 
claims  against  every  other  member.  A  comparison  of 
the  debits  with  the  credit  of  each  bank  shows  either 
that  every  member  of  the  Clearing  House  owes  some- 
thing to  the  other  members,  or  is  owed  something  by 
them.  All  these  claims  can  be  cleared  or  liquidated, 
therefore,  in  case  the  debtor  banks,  that  is  to  say  those 
banks  whose  claims  against  other  banks  are  less  than  the 
sum  of  other  banks  against  them,  pay  to  the  Clearing 
House  the  amount  of  these  differences,  and  on  the 
other  hand,  if  the  creditor  banks  receive  this  amount  in 


CREDIT  139 

due  proportions  from  the  Clearing  House.  The  First 
National  was  creditor  on  the  day  in  question  to  the  ex- 
tent of  $10,000.  At  the  close  of  the  day,  therefore, 
it  received  $10,000  from  the  Clearing  House. 

104.  The  deposit  currency  is  a  check  currency. — The 
most  important  result  of  this  operation  has  been  already 
suggested.  Because  the  checks  which  are  drawn 
against  the  First  National  of  Minneapolis  by  its  de- 
positors are  constantly  being  offset  through  the  Clear- 
ing House  by  checks  upon  other  banks  deposited  with 
it  for  collection,  the  First  National  Bank  is  able  to 
issue  promises  to  pay  money  in  the  form  of  deposits 
whose  aggregate  amount  is  several  times  greater  than  the 
amount  of  cash  which  it  has  on  hand.  On  September  6, 
1904,  this  bank  reported  $5,271,073  of  deposits  and 
$981,856  of  cash.  Its  liabilities  to  pay  money  on  de- 
mand, it  will  be  seen,  were  over  five  times  as  great  as  the 
amount  of  money  it  had  to  meet  these  obligations.  This 
is  made  possible  by  the  constant  stream  of  claims  upon 
other  banks  which  is  flowing  into  the  First  National 
Bank  for  collection,  and  also  by  the  constant  stream 
of  payments  on  account  of  its  loans.  As  a  result  of 
this  offsetting  of  claims  against  each  other,  the  First 
National  Bank  of  Minneapohs  is  able  to  issue  and  to 
keep  in  circulation  by  means  of  checks  drawn  by  its 
depositors,  an  amount  of  promises  to  pay  several  times 
the  sum  of  money  which  it  has  on  hand.  These  prom- 
ises to  pay  circulate  throughout  the  West  and  may  even 
travel  to  New  York,  Boston  or  San  Francisco,  every- 
where paying  debts,  buying  commodities  and  perform- 
ing the  work  of  money.  These  bank  deposits  therefore 
are,  properly  speaking,  to  be  included  among  the  funds 
of  the  community.  They  constitute  a  part  and  the  mosi. 
important  part  of  the  medium  of  exchange.     They  are 


140  ECONOMICS 

not  money;  they  are  merely  promises  to  pay  money, 
but  owing  to  the  development  of  banking  methods, 
these  credit  instruments  perform  all  the  work  which 
money  would  otherwise  be  called  upon  to  do.  We  may 
call  these  funds,  therefore,  credit  funds  as  distinguished 
from  the  money  funds  already  described. 

105.  Limitations  of  bank  credit. — The  issue  by  banks 
of  promises  to  pay  money  is  limited  by  its  cash  reserve. 
Both  experience  and  law  require  that  the  bank  should 
keep  a  certain  proportion  of  its  deposits  in  cash  with 
which  it  may  redeem  its  obligations,  because  if  they 
are  not  met  when  presented,  the  bank  must  close  its 
doors.  This  percentage  varies  from  10  to  25  per  cent 
in  the  United  States,  and  in  this  way  the  issue  of  prom- 
ises to  pay  money  is  limited  by  the  amount  of  money 
which  the  bank  keeps  in  its  vaults,  which  in  turn  is 
limited  by  the  requirements  of  the  community  for  cash 
with  which  to  carry  on  retail  transactions,  such  cash  be- 
ing withdrawn  from  bank  reserves. 

106.  Extent  to  which  "promises  to  pay''  are  used. — 
We  see  now  that  the  work  of  exchange  in  the  United 
States  is  performed  almost  entirely  by  promises  to  pay 
gold,  either  directly  or  indirectly.  The  government 
issues  promises  to  pay  gold  in  the  form  of  paper  money ; 
the  banks  issue  these  promises  in  the  form  of  bank  notes, 
and  these  notes  are  practically  guaranteed  by  the  gov- 
ernment. These  promises  to  pay  gold  are  taken  as 
equivalent  to  gold  because  the  government  stands  ready 
to  redeem  them  in  gold  at  any  time.  A  much  larger 
part  of  the  work  of  exchange,  over  90  per  cent  of 
the  whole  number  of  exchanges,  is  performed  by  the 
use  of  credit  instruments — promises  to  pay  money  on 
demand  which  are  sold  by  the  bank  to  its  borrowers 
and  depositors.     These  promises  are  accepted  at  par 


CREDIT  141 

with  actual  money  because  their  makers  are  known  to 
be  responsible  and  because  at  any  time  a  check  can  be 
turned  into  money  at  the  bank. 

107.  Bam  of  bank  credit. — T^je  confidence  in  the 
bank's  ability  and  willingness  t^:,  redeem  its  promises 
to  pay,  according  to  the  terms  of  the  promise,  is  based 
upon  three  things:  (1)  Upon  the  reputation  and  bus- 
iness standing  of  its  directors  and  officers;  (2)  upon 
the  money  reserve  of  the  bank — an  amount  of  cash  held 
in  its  vaults,  usually  from  10  to  25  per  cent  of  its  obli- 
gations outstanding  against  it — an  amount  which  is 
deemed  sufficient  to  meet  any  actual  demand  for  cash 
which  may  arise;  (3)  upon  the  bills  receivable  of  the 
bank,  mainly  consisting  of  the  promises  to  pay  money, 
sold  to  it  at  different  times  by  its  customers  and  coming 
due  in  an  uninterrupted  series. 

We  see  then  that  the  basis  of  bank  credit  is  almost 
identical  with  the  basis  of  government  credit.  The 
reasons  why  the  bank's  promises  to  pay  are  taken  at 
par  with  gold,  are  generally  identical  with  the  reasons 
which  influence  exchangers  to  accept  paper  money  at 
par  with  gold.  In  each  case  there  is  a  general  confi- 
dence in  the  willingness  of  the  government  or  of  the 
bank  to  redeem  its  promises,  and  as  a  specific  and  con- 
vincing evidence  of  the  ability  to  redeem,  there  is  (1) 
a  store  of  actual  cash  and  (2)  evidence  of  the  ability 
to  get  cash,  if  this  store  should  be  exhausted. 

We  now  understand  the  composition  of  the  medium 
of  exchange  in  the  United  States.  It  is,  all  of  it,  based 
upon  gold  as  a  foundation.  Besides  gold,  there  are 
promises  to  pay  gold  issued  by  the  government  and 
promises  to  pay  money  issued  by  the  bank.  This  me- 
dium of  exchange  can  also  be  divided  into  money  funds 
— gold  and  promises  to  pay  gold — and  credit  funds — • 
promises  to  pay  money. 


CHAPTER   IV 

BANKING   SYSTEMS 

108.  National  banks  in  the  United  States. — The  Na- 
tional Banking  Law,  which  dates  from  February  25, 
1863,  has  been  amended  at  various  times,  the  most  radi- 
cal changes  being  by  the  Federal  Reserve  Act  of 
December  23,  1913.  Over  two-thirds  of  the  country's 
banking  business  is  carried  on  by  members  of  the  Na- 
tional system,  which  is  organized  as  follows: 

Continental  United  States,  exclusive  of  Alaska,  is 
divided  into  twelve  districts,  in  each  of  which  there  is 
located  a  federal  reserve  bank  with  power  to  establish 
branches  in  its  own  district.  All  national  banks  are 
required  to  subscribe  to  the  capital  of  the  reserve  bank 
of  their  district  an  amount  equal  to  six  per  cent  of 
their  own  capital  and  surplus.  One-half  of  this  sub- 
scription must  be  paid  in;  the  remainder  is  subject  to 
call  by  the  Federal  Reserve  Board.  This  board,  which 
is  composed  of  seven  members,  including  the  secretary 
of  the  Treasury  and  the  comptroller  of  the  currency, 
has  general  supervision  of  the  system.  There  is  a  Fed- 
eral Advisory  Council  of  twelve  members  which  acts  in 
an  advisory  capacity  to  the  Federal  Reserve  Board. 

Any  number  of  persons,  not  less  than  five,  may  form 
an  association  for  banking  purposes,  to  continue  for 
twenty  years.  As  soon  as  they  have  complied  with  the 
provisions  of  the  law,  the  comptroller  of  the  currency 
issues  a  certificate  authorizing  them  to  begin  business 
as  a  national  bank. 

State  banking  corporations  may  become  national 
banks  or  they  may,  at  the  discretion  of  the  Federal  Re- 
serve Board,  become  stockholders  in  the  reserve  bank  of 

142 


BANKING    SYSTEMS  148 

their  districts  without  giving  up  their  state  charters, 
providing  that  such  action  is  not  contrary  to  their  state 
laws.  A  certain  minimum  capital  is  required  for  all 
members  of  the  system,  the  amount  ranging  from 
$25,000  in  towns  of  3,000  inhabitants  or  less  to  $200,000 
in  towns  of  over  50,000  inhabitants.  Fifty  per  cent  of 
the  subscribed  capital  must  be  paid  in  advance,  and  the 
remainder  must  be  paid  in  monthly  installments  of  not 
less  than  ten  per  cent  each. 

109.  Powers. — Under  the  old  National  Banking  Act 
national  banks  were  empowered  as  follows:  To  discount 
promissory  notes,  drafts,  bills  of  exchange,  and  other 
evidences  of  debt;  to  receive  deposits;  to  buy  and  sell 
bills  of  exchange,  coin  and  bullion;  to  lend  money  on 
personal  security ;  and  to  issue  circulating  notes.  Under 
the  Federal  Reserve  Act  they  are  further  empowered 
to  make  acceptances  of  certain  kinds  of  bills  of  exchange 
arising  out  of  foreign  trade  transactions ;  to  make  loans 
on  farm  lands  under  certain  conditions ;  to  establish  for- 
eign branches;  to  rediscount  commercial  paper  with  the 
federal  reserve  banks;  to  accept  government  deposits. 
Certain  other  powers  of  lesser  importance  are  granted. 

Unless  prohibited  by  state  law,  state  banks,  which  are 
members  of  the  system,  may  make  acceptances,  redis- 
count at  the  reserve  banks,  and  receive  government  de- 
posits. Government  funds  may  also  be  deposited  with 
the  federal  reserve  banks. 

National  banks  and  the  federal  reserve  banks  have  a 
monopoly  of  note  issue.  State  bank  notes  were  driven 
out  of  existence  in  1866  by  the  imposition  of  a  ten  per 
cent  tax.  Provision  is  made  for  the  retirement  of  na- 
tional bank  notes  and  the  bonds  deposited  against  them. 
Federal  reserve  banks  are  allowed  to  issue  bond-secured 
notes  and  also  federal  reserve  notes  which  are  secured 
by  the  assets  of  the  issuing  bank  and  by  certain  other 


14.4  ECONOMICS 

guaranties.  Various  other  powers  are  given  the  federal 
reserve  banks  so  as  to  make  them  bankers'  banks,  which 
do  not  enter  into  direct  competition  with  the  ordinary 

banks. 

For  details  of  the  Federal  Reserve  Act,  consult  Vol- 
ume IX,  Banking. 

110.  Reserves. — Federal  reserve  banks  are  required 
to  maintain  reserves  in  gold  or  lawful  money,  of  not 
less  than  thirty-five  per  cent  against  deposits  and  re- 
serves in  gold  of  not  less  than  forty  per  cent  against 
federal  reserve  notes  in  actual  circulation  and  not  off- 
set by  gold  or  lawful  money  deposited  with  the  federal 
reserve  agent.  The  forty  per  cent  reserve  may  be  low- 
ered at  the  discretion  of  the  Federal  Reserve  Board  on 
condition  that  the  reserve  bank  pays  a  tax  on  any  defi- 
ciency in  reserves. 

Every  member  bank  located  in  New  York,  Chicago 
and  St.  Louis,  designated  as  "central  reserve  cities," 
must  keep  a  reserve  equal  to  eighteen  per  cent  of  its 
demand  deposits;  banks  in  certain  other  cities,  known 
as  ''reserve  cities,"  fifteen  per  cent;  all  other  member 
banks  twelve  per  cent.  All  member  banks  must  carry 
a  five  per  cent  reserve  against  time  deposits,  which  are 
defined  as  deposits  subject  to  thirty  days'  notice.  Re- 
serves against  the  two  classes  of  deposits  are  lumped 
together  and  divided  between  cash  in  the  bank's  own 
vaults,  funds  on  deposit  with  the  federal  reserve  banks, 
and  with  approved  reserve  agents. 

If  a  bank  increases  its  deposits  so  that  its  reserve 
falls  below  the  requirement,  the  comptroller  may  notify 
the  bank  that  it  is  violating  the  law,  and  if  it  fails  to 
bring  up  this  reserve,  it  may  be  put  into  liquidation. 
No  national  bank  may  lend  more  than  one-tenth  of  its 
capital  and  unimpaired  surplus,  to  any  one  person,  cor- 
poration or  firm,  except  that  loans  on  farm  lands  may 
be  made  up  to  twenty-five  per  cent  of  capital  and  sur- 


BANKING    SYSTEMS  146 

plus  or  one-third  of  the  amounts  on  time  deposits.  This 
does  not  apply  to  the  discounting  of  commercial  paper 
or  bills  of  exchange. 

The  business  of  the  bank  is  managed  by  a  board  of 
not  less  than  five  directors,  each  of  whom  must  own  at 
least  five  shares  of  the  capital  stock,  if  the  capital  is 
$25,000,  and  ten  shares  if  it  exceeds  that  amount.  The 
stockholders  of  a  national  bank  are  individually  liable 
for  all  debts  not  covered  by  its  assets  to  the  extent  of 
the  par  value  of  their  shares.  This  is  what  is  known 
as  the  double  liability  of  national  bank  stockholders. 

111.  Bank  of  England. — The  Bank  of  England,  the 
most  important  in  the  world,  furnishes  the  circulating 
medium  of  Great  Britain  and  acts  as  the  fiscal  agent 
of  the  British  government.  This  bank  is  a  private  cor- 
poration. In  its  deposit  functions,  the  Bank  of  Eng- 
land is  subject  to  no  restrictions,  but  its  issue  of  notes 
must  be  made  according  to  a  law  passed  in  1844. 

For  details  consult  Chapter  XII,  Part  I,  Volume 
IX,  Banking. 

The  Bank  of  England  is  allowed  to  issue  notes 
against  securities  held  in  its  vaults  to  the  amount  of 
$89,669,000.  Any  additional  notes  which  are  issued 
must  be  secured  by  a  deposit  of  gold  coin  or  bullion  to 
an  equal  amount.  The  Bank  of  England  maintains  a 
very  large  reserve  against  its  deposits  on  account  of  the 
fact  that  the  joint  stock  banks  and  private  banks  which 
do  most  of  the  banking  business  in  the  United  Kingdom 
deposit  nearly  all  their  cash  with  the  Bank  of  Eng- 
land. The  entire  credit  structure  of  England  pr^ti- 
cally  rests  therefore  upon  the  reserve  of  coin  and  bullion 
which  is  kept  in  the  Bank  of  England  and  which  seldom 
falls  below  45  per  cent,  frequently  rising  to  55  and  60 
per  cent. 

112.  Bank  of  France. — The  Bank  of  France  also 
acts  as  the  fiscal  agent  of  the  French  government,  and 

I— le 


146  ECONOMICS 

has  a  monopoly  of  note  issue  in  France.  It  is  author- 
ized by  law  to  issue  5,800,000,000  francs,  equivalent  to 
over  $1,000,000,000,  of  notes.  This  is  a  private  bank, 
under  government  control.  Its  reserve  is  not  fixed  by 
law.  In  practice  the  reserve  which  the  Bank  of  France 
keeps  against  its  circulating  notes  is  almost  equal  to 
the  amount  of  notes  outstanding.  The  deposit  and 
check  system  is  little  used  in  France,  most  of  the  busi- 
ness of  that  country  being  transacted  with  bank  notes. 
These  notes,  owing  to  the  large  reserve  which  the  bank 
keeps,  are  as  well  secured  as  those  of  the  Bank  of  Eng- 
land or  of  the  national  banks  of  the  United  States. 

113.  Imperial  Bank  of  Germany. — The  Imperial 
Bank  of  Germany  was  established  in  1875.  The  bank 
is  privately  owned  but  is  under  absolute  government 
control.  The  president  and  directors  are  appointed  by 
the  German  Emperor  for  life,  and  the  officers  of  the 
bank  are  considered  government  officials.  The  share- 
holders have  some  control  over  the  management  through 
a  committee  which  they  appoint.  At  the  time  the  bank 
act  was  passed,  there  were  thirty-two  independent  banks 
in  the  German  Empire,  having  the  right  of  note  issue. 
They  were  allowed  to  issue  135,000,000  marks  ($33,- 
750,000)  in  notes,  against  which  no  cash  reserve  was 
kept,  but  all  except  seven  have  abjured  the  right  of 
issue.  The  Reichsbank,  or  Imperial  Bank,  is  allowed 
to  issue  550,000,000  marks  ($130,900,000)  of  uncov- 
ered notes.  When  any  private  bank  ceases  to  issue 
notes,  its  rights  of  note  issue  pass  to  the  Reichsbank. 
For  any  notes  above  the  uncovered  issue  the  bank 
must  hold  an  equal  amount  of  cash  in  its  reserve,  but 
it  may  exceed  this  limitation  of  cash  reserve  by  paying 
to  the  Imperial  Treasury  a  tax  of  5  per  cent  on  the 
surplus  issue. 

114.  Protection  of  hank  note  issues. — It  will  be  ob- 


BANKING    SYSTEMS  147 

served  from  the  foregoing  that  the  right  of  issuing 
bank  notes  in  these  four  countries  which  have  been 
examined  is  very  strictly  limited  by  law.  It  is  felt  that 
bank  notes  which  serve  as  money  and  which  are  received 
as  money  by  everyone,  should  have  special  safeguards 
and  protections  thrown  about  them  to  insure  their 
immediate  convertibility.  This  is  accomplished  in  the 
United  States  by  the  bond  deposit  and  by  the  redemp- 
tion fund;  in  England,  by  the  reserve  of  securities 
against  uncovered  notes;  in  France,  by  the  custom  of 
keeping  a  high  reserve  of  cash;  and  in  Germany,  by  a 
reserve  of  securities  with  cash  deposits  for  any  notes  in 
excess  of  a  sum  fixed  by  law. 

115.  Asset  currency. — It  has  long  been  proposed 
in  the  United  States  that  the  national  banks  should  be 
allowed  to  issue  notes  on  the  security  of  their  assets, 
on  the  ground  that  the  national  bank  currency  does  not 
increase  and  decrease  according  to  the  demands  of  trade. 
These  asset  bank  notes,  if  they  should  be  authorized, 
would  increase  and  diminish  in  exactly  the  same  manner 
as  the  bank  deposits  do  at  present,  and  they  would 
serve  a  useful  purpose  in  supplying  special  demands  for 
cash  especially  in  the  West  and  South  at  certain  seasons 
of  the  year.  These  western  and  southern  banks  during 
eight  months  of  the  year,  under  the  provisions  of  the 
National  Banking  Law,  deposited  a  large  amount  of 
their  cash  in  the  eastern  cities.  This  money  went  into 
the  reserves  of  the  eastern  banks  and  was  made  the  basis 
of  deposit  credits.  In  the  late  summer  and  fall,  cash  is 
needed  in  the  West  and  South  to  move  the  crops  and 
pay  the  farm  hands.  These  western  and  southern  banks 
at  this  time  called  back  the  cash  which  they  had  in 
eastern  cities,  reducing  the  reserves  of  the  eastern  banks, 
forcing  them  to  call  loans  in  order  to  reduce  their  de- 
posits to  the  legal  requirement,  and  this  return  move- 


148  ECONOMICS 

merit  of  cash  frequently  resulted  in  severe  stringency  in 
the  money  market.  It  has  been  argued  that  if  the 
national  banks  were  allowed  to  issue  notes  against  their 
deposits,  this  withdrawal  of  money  from  the  East  could 
be  avoided.  The  Federal  Reserve  Act  provides  for  an 
issue  of  notes  against  the  assets  of  the  federal  reserve 
banks.  Asset  bank  currency  is  severely  criticised  on  the 
ground  that  the  security  of  these  notes  would  be  inade- 
quate and  that  the  money  of  the  people  cannot  be  too 
thoroughly  protected.  The  experience  of  other  coun- 
tries, however,  indicates  that  notes  of  this  kind  can  be 
made  as  secure  as  any. 

•  Asset  bank  notes,  moreover,  it  has  been  pointed  out  by 
Professor  Joseph  French  Johnson  ^  and  other  writers  on 
finance,  cannot  furnish  a  perfectly  elastic  currency  in 
the  United  States  because  of  the  existence  in  circulation 
at  present  of  a  large  amount  of  token  paper  money 
suitable  for  use  in  bank  reserves.  National  banks  are 
not  allowed  to  include  national  bank,  or  federal  reserve 
notes  in  their  reserve.  The  effect  of  issuing  more  bank 
notes  under  an  asset  currency  plan  may  be,  therefore, 
that  the  banks  will  substitute  the  new  notes  by  paying 
them  out  over  their  counters,  for  an  equal  amount  of 
legal  tender  money,  which  they  were  formerly  obliged 
to  pay  out  into  the  circulation  but  which  they  can  now 
place  in  their  reserves,  enlarging  in  this  way  the  basis 
of  their  loan  credit.  Under  these  circumstances,  the 
currency  would  not  be  elastic,  since  it  would  be  profit- 
able for  the  banks  to  maintain  such  notes  in  circulation, 
and  the  only  substantial  change  from  the  old  system 
would  be  a  considerable  expansion  of  bank  deposits  and 
loans  on  the  strength  of  these  larger  reserves. 

*  See  "  Money  and  Currency,"  by  J.  P.  Johnson,  Chapter  XV;  "  Schemes  for 
Currency  Reform,"  by  J.  F.  Johnson,  Journal  of  Accountancy,  January,  1908;  also 
Volume  IX  of  Modern  Business. 


CHAPTER  V 

PRICES 

116.  Howvalue  is  determined. — What  is  value?  We 
have  already  defined  this  term  in  a  general  way  in  dis- 
cussing wealth.  A  thing  is  economically  valuable  which 
has  utility  or  desirabihty,  and  which  is  so  limited  in 
quantity  that  it  can  be  appropriated  as  private  property. 
The  value  of  any  commodity  is  measured  by  the  quantity 
of  other  goods  which  will  be  given  to  obtain  it.  For 
this  reason,  the  value  of  any  commodity  must  be  ex- 
pressed in  terms  of  some  other  commodity ;  thus  a  bushel 
of  wheat  is  worth  142  pounds  of  pig  iron  or  23.2  grains 
of  gold.  Every  commodity  may,  in  this  way,  be  related 
to  every  other  commodity  in  terms  of  value. 

That  a  thing  may  have  any  value  in  exchange,  two  conditions 
are  necessary.  It  must  be  of  some  use;  that  is  (as  already  ex- 
plained) it  must  conduce  to  some  purpose,  satisfy  some  desire. 
No  one  will  pay  a  price,  or  part  with  anything  which  serves 
some  of  his  purposes,  to  obtain  a  thing  which  serves  none  of 
them.  But,  secondly,  the  thing  must  not  only  have  some 
utility,  there  must  also  be  some  difficulty  in  its  attainment, 
"any  article  whatever,"  says  Mr.  DeQuincey,^  "to  obtain 
that  artificial  sort  of  value  which  is  meant  by  exchange  value, 
must  begin  by  offering  itself  as  a  means  to  some  desirable  pur- 
pose ;  and  secondly,  even  though  possessing  incontestably  this 
preliminary  advantage,  it  will  never  ascend  to  an  exchange  valut 
in  cases  where  it  can  be  obtained  gratuitously  and  without  effort ; 
of  which  last  terms  both  are  necessary  as  limitations.     For  often 

1**  Logic  of  Political  Economy,"  p.  13. 

149 


160  ECONOMICS 

it  will  happen  that  some  desirable  object  may  be  obtained  gra- 
tuitously ;  stoop,  and  you  gather  it  at  your  feet ;  but  still,  be- 
cause the  continued  iteration  of  this  stooping  exacts  a  laborious 
effort,  very  soon  it  is  found,  that  to  gather  for  yourself  vir- 
tually is  not  gratuitous.  In  the  vast  forests  of  the  Canadas,  at 
intervals,  wild  strawberries  may  be  gratuitously  gathered  by 
shiploads ;  yet  such  is  the  exhaustion  of  a  stooping  posture,  and 
of  a  labor  so  monotonous,  that  everybody  is  soon  glad  to  re- 
sign the  service  into  mercenary  hands."  ^ 

Upon  what  now  does  the  value  of  any  commodity 
depend?  Upon  what  is  known  as  its  marginal  or  final 
utility — that  is  to  say,  the  estimate  of  the  intending 
purchaser  as  to  the  desirability  of  the  last  bushel  of 
wheat,  the  last  pound  of  cotton  or  the  last  yard  of  cloth 
which  is  offered  to  him.  It  is  a  well-known  fact,  of 
which  any  one  can  satisfy  himself  by  observation,  that 
the  satisfaction  derived  from  the  use  of  any  commodity 
diminishes  as  the  quantity  of  that  commodity  to  be  used 
or  consumed  is  increased.  An  amusing  illustration  of 
this  is  furnished  by  the  attempts  of  the  summer  boarder 
to  satisfy  his  appetite  for  peaches  or  grapes;  he  very 
soon  discovers  that  the  satisfaction  derived  from  the 
consumption  of  fruit  diminishes  rapidly  as  the  amount 
eaten  increases. 

In  the  field  of  exchange,  since  each  apple  or  each  yard 
of  cloth  of  a  given  quality  or  grade  is  identical  with 
every  other  apple  or  yard — no  greater  importance 
will  be  placed  upon  the  last  unit  of  the  commodity  than 
upon  the  first.  In  other  words,  the  utility  or  de- 
sirability of  every  bushel  or  pound  or  yard  of  a  com- 
modity will  be  the  utility  or  desirability  of  the  last  or 
final  unit  offered  for  sale.  As  the  utility  of  an 
increasing  supply  of  a  commodity  declines,  the  sacrifice 

1/    S.  Mill,  "Principles  of  Political  Economy,"  Book  III,  Chapter  II. 


PRICES  161* 

which  will  be  made  by  some  other  than  its  owner  to 
obtain  possession  of  it,  expressed  in  terms  of  the  com- 
modities which  the  intending  purchaser  has  to  offer, 
declines  also;  in  other  words,  the  demand  weakens.  As 
a  result  let  us  say,  of  the  increasing  supply  of,  and  the 
decreasing  demand  for,  wheat  as  compared  with  cloth, 
the  value  of  wheat,  in  terms  of  cloth,  declines  and  con- 
versely the  value  of  cloth  in  terms  of  wheat  rises. 

We  thus  arrive  at  an  explanation  of  the  well-known 
law  of  political  economy,  that  value  depends  upon  the 
interaction  of  supply  and  demand ;  in  common  language, 
value  depends  upon  supply  and  demand.  So  much  for 
the  theoretical  aspect  of  the  value  question. 

In  effect,  the  importance  of  any  unit  of  a  commodity  is 
determined  by  the  want-satisfying  power  of  the  marginal  unit. 
The  importance  of  a  unit,  thus  determined,  is  termed  its  effective 
utility. 

But  does  any  man  really  arrange  his  wheat  or  other  goods 
in  series  of  units  and  say  to  himself:  "This  unit  is  worth  one 
thousand  x ;  without  it  I  should  starve ;  this  unit  is  worth  one 
hundred  x,  as  my  comfort  and  strength  depend  upon  it;  this 
unit  is  worth  five  x,  for  if  I  did  not  have  it  I  should  be  com- 
pelled to  do  without  my  pets"?  Not  at  all;  the  different  units 
are  just  alike,  and  one  is  thought  of  as  just  as  desirable  as 
another.  For  practical  purposes,  the  utility  of  one  unit  is  the 
same  as  that  of  another.  Let  us  suppose  that  there  are  four 
units  of  wheat,  and  that  the  last  has  a  utility  of  five  x.  What 
is  lost  if  any  one  of  the  four  units  is  lost?  Simply  five  x. 
What  sacrifice  would  one  make  to  prevent  the  loss  of  any  unit, 
even  the  one  which  would  have  been  used  to  sustain  life,  and  by 
itself  would  be  worth  one  thousand  x?  A  sacrifice  not  greater 
than  five  x.  For  if  any  other  unit  is  lost,  the  least  important 
one  will  be  substituted  for  it,  and  the  effective  loss  will  be  prop- 
erly placed  at  five  x. 

The  utility  of  the  last  and  least  important  unit,  then,  exer- 


16«  ECONOMICS 

cises  an  important  influence  in  determining  what  utility  one  will 
in  effect  ascribe  to  any  unit.  For  practical  purposes  the  utility 
of  any  unit  is  exactly  equal  to  that  of  the  least  important  one. 
The  utility  of  a  unit,  thus  measured  by  that  of  the  least  im- 
portant one,  is  called  "effective  utility." 

If  the  total  number  of  units  of  a  good  is  so  great  that  the 
last  one  has  no  utility,  the  good  has  no  effective  utility  at  all. 
No  one  will  do  anything  to  prevent  the  destruction  of  part  of 
his  supply ;  no  one  will  give  anything  to  increase  his  supply. 
Thus  water,  although  a  single  gallon  would  have  indefinitely 
great  utility  if  this  were  the  only  gallon  available,  is  in  most 
places  so  abundant  that  the  last  units  of  the  supply  have  no 
utility.     Therefore  no  unit  has  effective  utility.^ 

117.  Value  of  commodities  expressed  only  in  money. 
— In  our  discussion  of  money  we  found  that  everything 
was  exchanged  for  the  medium  of  exchange,  and  con- 
versely, that  the  medium  of  exchange  was  exchanged  for 
every  commodity  that  is  produced.  The  division  of 
labor,  through  which  the  modern  miracles  of  production 
have  been  accomplished,  was  only  made  possible  because 
every  productive  agent  and  every  locality  was,  through 
the  institution  of  exchange,  left  free  to  be  devoted  to 
some  highly  specialized  employment.  The  result  of 
this  institution  of  money  exchange  is  that  commodities 
are  never  in  actual  practice  expressed  in  terms  of  each 
other,  but  in  terms  of  money.  When  a  farmer  takes 
his  wheat  to  market  he  is  not  thinking  of  the  value  of 
that  wheat  in  terms  of  lumber,  coal  or  groceries.  He 
may  have  use  at  that  time  for  none  of  these  things;  he 
is  thinking  of  its  value  in  terms  of  money.  He  is  not 
interested  in  how  much  cotton  cloth  he  can  get  for  his 
wheat,  but  in  the  quantity  of  money  he  is  to  receive. 

The  concern  of  every  producer  is  not  with   com- 

1  Alvin  S.  Johnson,  "  Introduction  to  Economics,"  Chapter  II,  pp.  27-28. 


PRICES  159 

modities  either  in  general  or  in  particular,  but  with 
money.  The  laboring  man  does  not  habitually  think  of 
his  wages  as  so  much  bread,  meat  and  clothing,  but 
as  so  much  money.  Only  when  the  individual  comes  to 
part  with  his  money  in  the  store  or  the  market,  does  the 
ultimate  importance  of  commodities  in  exchange  arise. 
In  reality,  every  producer  is  striving  for  the  necessities, 
comforts  and  luxuries  of  existence.  In  appearance 
and  in  present  fact,  however,  his  sole  concern  is  with 
money.  It  is,  therefore,  with  money  as  an  end  rather 
than  as  a  means  to  an  end  that  we  have  now  to  concern 
ourselves.^ 

1  Money,  when  its  use  has  grown  habitual,  is  the  medium  through  which 
the  incomes  of  the  diflferent  members  of  the  community  are  distributed 
to  them,  and  the  measure  by  which  they  estimate  their  possessions.  As 
it  is  always  by  means  of  money  that  people  provide  for  their  different 
necessities,  there  grows  up  in  their  minds  a  powerful  association  leading 
them  to  regard  money  as  wealth  in  a  more  peculiar  sense  than  any  other 
article;  and  even  those  who  pass  their  lives  in  the  production  of  the  most 
useful  objects,  acquire  the  habit  of  regarding  those  objects  as  chiefly 
important  in  their  capacity  of  being  exchanged  for  money.  A  person  who 
parts  with  money  to  obtain  commodities,  unless  he  intends  to  sell  them, 
appears  to  the  imagination  to  be  making  a  worse  bargain  than  a  person 
who  parts  with  commodities  to  get  money;  the  one  seems  to  be  spending 
his  means,  the  other  adding  to  them.  Illusions  which,  though  now  in 
some  measure  dispelled,  were  long  powerful  enough  to  overmaster  the 
mind  of  every  politician,  both  speculative  and  practical,  in  Europe. 

It  is  evident  now,  however,  that  the  mere  introduction  of  a  mode  of 
exchanging  things  for  one  another,  by  first  exchanging  a  thing  for  money, 
and  then  exchanging  the  money  for  something  else,  makes  no  difference  in 
the  essential  character  of  transactions.  It  is  not  with  money  that  things 
are  really  purchased.  Nobody's  income  (except  that  of  the  gold  or  silver 
miner)  is  derived  from  the  precious  metals.  The  pounds  or  shillings 
which  a  person  receives  weekly  or  yearly,  are  not  what  constitutes  his 
income;  they  are  a  sort  of  ticket  or  orders  which  he  can  present  for  pay- 
ment at  any  shop  he  pleases,  and  which  entitle  him  to  receive  a  certain 
value  of  any  commodity  that  he  makes  choice  of.  The  farmer  pays  his 
laborers  and  his  landlord  in  these  tickets,  as  the  most  convenient  plan 
for  himself  and  them;  but  their  real  income  is  their  share  of  corn,  cattle 
and  hay,  and  it  makes  no  essential  difference  whether  he  distributes  it 
to  them  directly  or  sells  it  for  them  and  gives  them  the  price;  but  as 
they  would  have  to  sell  it  for  money  if  he  did  not,  and  as  he  is  a  seller 


164.  ECONOMICS 

118.  Prices  and  profits. — ^We  shall  now  discuss  prices 
as  expressing  the  value  relation  between  com- 
modities at  any  particular  time.  It  really  makes  no 
difference  whether  prices  are  high  or  low  if  all  prices 
(including  labor)  are  high  or  low  at  the  same 
time.  It  is  the  time  relation  which  is  of  interest.  What 
will  prices  be  next  week,  next  month,  or  next  year? 
This  is  the  important  question. 

In  changes  of  price  are  found  the  profits  or  losses  of 
industry.  The  incentive  to  economic  activity  is  the  de- 
sire for  profit.  Under  present  conditions,  however,  man 
works  because  he  sees  something  ahead  for  himself  and 
personal  profit  is  the  mainspring  of  effort.  Profits  con- 
sist in  the  margin  between  cost  and  selling  price.  Costs 
are  made  up  of  the  price  paid  for  raw  materials,  wages, 
fixed  rentals,  depreciation  of  plant,  bad  debts  and  other 
losses  that  would  have  to  be  written  off.  Each  one  of 
these  items  moves  much  more  slowly  up  or  down  than  the 
price  of  the  product.  Fixed  charges,  such  as  interest, 
do  not  move  at  all;  wages  move  very  slowly.  The 
element  of  depreciation  is  fixed.  We  have  one  rate  for 
brick  buildings,  another  for  frame  buildings  and  another 

at  any  rate,  it  best  suits  the  purposes  of  all,  that  he  should  sell  their 
share  along  with  his  own,  and  leave  the  laborers  more  leisure  for  work 
and  the  landlord  for  being  idle.  The  capitalists,  except  those  who  are 
producers  of  the  precious  metals,  derive  no  part  of  their  income  from 
those  metals,  since  they  only  get  them  by  buying  them  with  their  own 
produce;  while  all  other  persons  have  their  incomes  paid  to  them  by  the 
capitalists,  or  by  those  who  have  received  payment  from  the  capitalists, 
and  as  the  capitalists  have  nothing  from  the  first  except  their  produce, 
it  is  that  and  nothing  else  which  supplies  all  the  incomes  furnished  by 
them.  There  cannot,  in  short,  be  intrinsically  a  more  insignificant  thing, 
in  the  economy  of  society,  than  money;  except  in  the  character  of  a  con- 
trivance for  sparing  time  and  labor.  It  is  a  machine  for  doing  quickly 
and  commodiously,  what  would  be  done,  though  less  quickly  and  com- 
modiously,  without  it;  and  like  many  other  kinds  of  machinery,  it  only 
exerts  a  distinct  and  independent  influence  of  its  own  when  it  gets  out  of 
order.— J.  S.  Mill,  "Political  Economy." 


PRICES  166 

for  machinery,  etc.,  but  they  do  not  change.  Selling 
and  administration  expenses  do  not  greatly  change. 
The  only  thing  that  does  change  to  any  extent  is  the 
price  of  materials.  Of  all  these  items  of  expense,  the 
last  named  is  the  only  one  that  you  can  modify  at  the 
same  rate  as  the  price  of  the  product.  The  result  is  that 
expenses  move  up  or  down  very  much  more  slowly  than 
the  selling  price  of  the  product.  Since  expenses  change 
much  more  slowly  than  the  price  of  the  product,  a  rise 
in  the  price  of  anything  means  an  increase  in  the  profits 
of  the  man  who  produces  that  product,  and  on  the  other 
hand,  a  fall  in  prices  almost  always  means  a  decrease 
in  profits.  It  is  unusual  that  any  one's  expenses  should 
increase  as  rapidly  as  the  price  of  his  products.  It  is 
even  more  unusual  that  a  man  should  decrease  his  cost 
of  production  as  rapidly  as  the  price  of  his  product  de- 
clines. 

From  these  facts  we  arrive  at  the  conclusion  that  rising 
prices  mean  profits  to  everybody  interested,  and  that 
falling  prices  mean  falling  profits.  Since  large  profits 
are  the  object  of  every  business  man's  endeavors,  the 
question  of  price  is  the  most  important  fact  of  the  busi- 
ness world.  The  man  who  knows  the  laws  influencing 
prices  in  his  business  is  assured  of  success. 

Professor  Johnson,  in  his  "Money  and  Currency,'* 
summarizes  the  importance  of  prices  very  clearly,  as 
follows : 

The  level  of  prices,  it  should  be  noticed,  is  itself  of  no  im- 
portance; it  does  not  matter  whether  prices  are  high  or 
low,  if  there  is  perfect  adjustment  between  prices  and  the 
supply  of  money.  Whether  the  value  of  the  dollar  shall 
be  much  or  little,  whether  prices,  in  other  words,  shall 
be  high  or  low,  is  of  no  more  consequence  than  the  ques- 
tion of  whether  the  mile  shall  contain  ten  thousand  or  five  thou- 


156  ECONOMICS 

sand  yards.  But  changes  in  the  value  of  a  dollar,  that  is 
changes  in  the  level  of  prices,  are  of  the  utmost  importance, 
for  they  are  always  attended  by  an  irregular  re-adjustment  of 
prices.  The  question  of  high  and  low  prices  is  entirely  dif- 
ferent from  the  question  of  rising  and  falling  prices. 

When  prices  are  rising  with  more  or  less  steadiness  the 
monetary  standard  is  called  a  "depreciating"  standard;  when 
they  are  falling  the  standard  is  said  to  be  "appreciating," 
growing  more  valuable.  Economists  have  generally  held  that 
the  effects  of  a  depreciating  standard,  if  the  rise  of  prices  is  not 
too  pronounced,  are  less  harmful  than  the  effects  of  an  appre- 
ciating standard.  We  have  already  in  the  preceding  chapter 
had  occasion  to  call  attention  to  the  remarkable  stimulus  to  in- 
dustry which  follows  from  a  steady  and  continuous  rise  of 
prices,  and  to  the  depressing  effect  of  falling  prices. 

The  disturbing  effects  of  a  change  in  the  value  of  the  stand- 
ard are  due  to  four  circumstances, — (1)  the  use  of  credit;  (2) 
the  fact  that  production  involves  a  period  of  time;  (3)  the  fact 
that  prices  do  not  change  uniformly,  and  (4)  the  psychology  of 
confidence  and  depression. 

It  is  evident  that  if  men  did  not  borrow  or  lend,  a  change  in 
the  level  of  prices  would  be  less  hurtful  than  it  is.  In  our  dis- 
cussion of  the  commodity  rate  of  interest  it  is  shown  that  a 
change  in  the  price  level  had  a  curious  effect  upon  relations  be- 
tween borrower  and  lender;  if  the  level  of  prices  is  rising,  the 
lender  receives  back  in  real  value  much  less  than  he  loaned; 
while  if  the  level  of  prices  is  falling,  the  borrower  is  obliged  to 
return  in  real  value  more  than  he  received.  If  prices  are  fall- 
ing, the  borrower,  in  order  to  repay  the  principal,  is  obliged  to 
sell  more  goods  than  he  was  able  to  buy  with  the  money  when 
he  borrowed  it. 

A  farmer  who  borrows  money  when  wheat  is  one  dollar  a 
bushel  is  very  much  discouraged  as  the  price  of  the  wheat  falls, 
for  his  ability  to  pay  his  debt  is  steadily  diminishing.  He  is 
injured  as  much  as  if  he  had  borrowed  one  thousand  bushels  of 
wheat  and  were  required  to  repay  the  loan  in  bushels  of  larger 
capacity.     The  farmer's  case  is  no  different  from  that  of  the 


PRICES  157 

man  who  borrows  money  or  credit  and  engages  in  manufactur- 
ing. A  certain  time  must  elapse  before  he  can  turn  the  capital 
over  and  go  into  the  market  with  his  finished  product.  If  in 
the  meantime  a  change  in  the  price  level  has  occurred  and  the 
price  of  his  product  has  been  lowered,  he  will  take  in  less  money 
than  he  expected,  his  money  profits  will  be  small,  and  his  ability 
to  pay  his  debt  will  be  impaired. 

It  is  incorrect  to  argue  that  this  entrepreneur  and  farmer  are 
both  just  as  well  off  with  less  money  because  the  value  of  money 
has  increased.  They  are  not  as  well  off.  If  prices  fell  uni- 
formly it  would  be  evident  to  everybody  that  the  purchasing 
power  of  a  dollar  had  increased  and  that  the  fall  of  prices  was 
due  not  to  overproduction  in  this  or  that  industry  but  to  a 
change  in  the  value  of  money,  and  men  might  learn  to  minimize 
the  evil  eiFects  of  such  a  change.  But  the  fall  is  not  uniform 
and  is  never  ascribed  by  business  men  to  changes  in  the  value 
of  money.  Indeed,  it  is  impossible  to  determine  in  any  given 
case  whether  a  fall  of  price  is  due  to  a  fall  of  value  in  a  par- 
ticular good  or  to  a  rise  in  the  value  of  money.  The  problem 
is  so  intricate  and  so  many  influences  are  involved  that  a  com- 
plete analysis  of  the  causes  in  any  particular  instance  cannot 
easily  be  made. 

Furthermore  a  fall  of  prices,  since  it  strikes  first  this  com- 
modity and  then  that,  always  catches  the  entrepreneur  unpre- 
pared. Inasmuch  as  the  wholesale  prices  are  the  first  affected, 
he  finds  that  his  cost  of  living  is  the  same  as  before;  the  prices 
of  some  of  his  raw  materials  have  declined,  but  others  have  not 
felt  the  change;  his  laboring  men  insist  upon  the  old  rate  of 
wages.  He  is  obliged  to  sell  at  a  lower  rate  of  prices  than  his 
money  costs  of  production  were  based  upon.  It  will  not  cheer 
him  to  tell  him  that  money  has  increased  in  value  and  that  the 
money  he  is  getting  for  his  goods  will  on  the  average  buy  more 
than  the  money  he  paid  out.  All  his  debts  are  money  debts. 
A  definite  sum  of  money  is  what  he  needs  in  order  to  keep  on 
his  feet.  The  thing  he  is  interested  in  is  prices,  not  values,  and 
the  inexplicable  turn  which  prices  have  taken  threaten  him  with 
ruin. 


168  ECONOMICS 

The  psychological  effects  of  a  change  in  the  price  level  are 
of  the  utmost  importance.  Very  few  men  who  engage  in  busi- 
ness or  industry  know  with  certainty  what  their  profits  are  going 
to  be.  The  production  of  wealth  is  always  attended  with  risk. 
Men  assume  this  risk,  sometimes  boldly,  sometimes  timidly.  If 
times  are  considered  good  and  the  prices  of  conspicuous  articles 
are  rising,  there  is  a  general  feeling  of  confidence  that  business 
ventures  can  safely  be  undertaken,  and  men  engage  freely  in 
production.  As  a  result  of  this  confidence  there  is  a  larger 
production  of  wealth  and  the  average  purchasing  power  of  every 
member  of  the  community  is  increased.  The  industrial  mil- 
lenium  would  be  reached  if  only  this  production  could  always  be 
wisely  directed;  that  is  to  say,  if  men  could  always  gauge  the 
wants  of  their  customers,  if  producers  could  foresee  changes  in 
the  popular  tastes  and  vary  their  productions  accordingly,  for 
then  the  condition  commonly  described  as  overproduction  would 
never  ensue.  The  ability  of  people  to  buy  would  grow  as  the 
supply  of  goods  increased.  Unfortunately,  however,  it  is  im- 
possible to  gauge  changes  in  the  demand  for  goods,  and  indus- 
trial mistakes  will  doubtless  continue  to  be  made  and  to  bring 
about  the  recurring  periods  of  prosperity  and  hard  times.  But 
of  the  effect  which  the  mental  condition,  the  hopefulness,  of 
a  people  has  upon  their  productivity  there  can  be  no  doubt. 
The  business  man  is  always  discouraged  by  any  loss  which  he 
cannot  understand  or  explain,  and  his  discouragement  is  com- 
municated like  a  contagious  disease  to  others.  Likewise  he  is 
greatly  stimulated  by  unexpected  profits,  and  his  new  confidence 
is  also  contagious,  stimulating  his  neighbors  to  enterprise. 

Here  we  find  perhaps  the  worse  effects  of  a  gradual  fall  of 
prices.  Men  do  not  and  probably  never  will  thoroughly  under- 
stand the  relation  between  money  and  goods.  To  them  money 
is  a  thing  of  fixed  and  changeless  value;  goods  are  what  they 
make  and  sell,  and  changes  in  prices  are  always  attributed  to 
changes  in  the  demand  for  or  supply  of  goods.  As  a  result, 
when  a  rising  demand  for  money  is  not  met  by  an  increased  sup- 
ply, and  the  prices  of  commodities  here  and  there  begin  to 
weaken  business  men  are  unable  to  explain  the  phenomenon  and 


1 


PRICES  169 

are  puzzled  and  distressed.  The  practical  man  usually  attributes 
such  a  fall  in  prices  to  excessive  competition  and  overproduc- 
tion. During  the  last  twenty-five  years  of  the  nineteenth  cen- 
tury these  two  phrases  were  in  everybody's  mouth  in  explana- 
tion of  the  heavy  prices  and  vanishing  profits  of  that  period; 
and  many  a  young  man  was  advised  to  keep  out  of  business  and 
enter  one  of  the  professions  on  the  ground  that  business  was 
"overdone." 

119.  The  making  of  prices. — Upon  what  do  prices 
depend?  By  this  we  have  to  understand  particular 
prices,  not  general  or  average  prices.  We  are  con- 
cerned with  the  prices  of  flour,  wheat,  wool,  meat  and 
eggs.  What  influences  the  quantity  of  money  for  which 
these  commodities  in  suitable  units  and  denominations 
will  be  exchanged?  To  answer  this  question  it  is  ad- 
visable to  see  the  price-making  process  as  it  actually 
goes  on  in  the  produce  exchange. 

Every  newspaper  reader  is  familiar  with  the  Chicago 
Board  of  Trade.  Most  people  have  also  heard  of  the 
New  York  Cotton  Exchange,  the  Coffee  Exchange  or 
New  York  Produce  Exchange.  Every  large  city  in  the 
United  States  has  one  or  more  of  these  exchanges,  which 
are  places  where  buyers  and  sellers  can  come  together 
and  where  prices  are  made. 

The  Chicago  Board  of  Trade,  for  example,  is  a 
voluntary  association  whose  primary  object  is  to  afford 
a  place  for  dealing  in  grain  and  other  provisions.  Its 
members  are  called  brokers.  They  may  buy  and  sell 
for  themselves,  but  as  a  rule  they  buy  and  sell  for  others, 
sometimes  their  employers,  sometimes  outsiders  who  em- 
ploy them  for  particular  transactions.  The  members  of 
the  board  of  trade  are  constantly  engaged  in  buying  and 
selling  on  the  most  favorable  terms  that  can  be  secured. 
In  order  to  do  this,  they  are  constantly  engaged  in  fore- 


160  ECONOMICS 

casting  the  forces  causing  the  prices  of  wheat,  corn,  oats, 
pork  and  other  staple  food  products  to  rise  or  fall. 

They  must  scan  the  newspapers  with  constant  care 
for  the  latest  news  of  disturbance  or  prosperity  through- 
out the  world.  In  addition  they  watch  the  news  ticker 
service  which  tells  them  of  any  important  happening 
within  a  few  minutes — sometimes  seconds — after  its  oc- 
currence. Their  private  advices  as  to  weather,  crop 
conditions,  and  the  like,  keep  flowing  in. 

The  wheat  market  of  the  Chicago  Board  of  Trade  on 
Monday,  March  24,  1913,  was  described  as  follows  in 
the  New  York  Commercial: 

While  the  tone  in  wheat  was  generally  steady,  trade  was 
limited,  mostly  the  result  of  the  poor  wire  service  which  inter- 
fered with  news  dispatches  and  the  forwarding  of  orders.  The 
principal  factor  was  the  reports  of  severe  wind  storms  at  many 
points  in  the  winter  wheat  belt,  particularly  west  of  the  Mis- 
sissippi River.  This  did  not  have  much  influence,  however,  for 
while  snow  covering  is  not  heavy  the  belief  was  that  the  crop 
has  not  advanced  far  enough  to  be  damaged  by  wind  storms. 
Another  important  factor  was  the  advance  of  nearly  two  cents 
a  bushel  at  Buenos  Aires  at  the  opening.  This  was  due  to 
unfavorable  weather  for  the  movement  and  an  improved  foreign 
demand.  The  cash  and  export  demand  here  continues  limited. 
European  markets  were  generally  closed  owing  to  the  Easter 
holidays.    Weekly  statistics,  however,  were  about  as  expected. 

120.  Factors  which  influence  price. — ^What  are  the 
factors  which  here  appear  to  influence  the  prices  of 
grain?  We  may  consider  them  (1)  under  the  head  of 
supply  and  (2)  under  the  head  of  demand.  In  dis- 
cussing supply  we  should  remember  that  everything 
that  is  produced  will  be  eventually  sold,  that  is  to  say,  it 
is  all  destined  for  the  market.  The  factors  that  the 
broker  takes  into  account  in  estimating  the  supply  of 
wheat  are;      (1)    the  visible   supply,   the  amount   of 


PRICES  161 

wheat  in  elevators  and  in  transit  between  this  country 
and  Europe  and  between  grain  fields  and  the  various 
centers;  (2)  the  stock  of  wheat  in  local  elevators  and  in 
farmers' hands ;  (3)  the  size  of  the  growing  crop.  Esti- 
mates are  to  be  had  at  regular  intervals  by  the  Depart- 
ment of  Agriculture  giving  the  condition  of  wheat  in 
different  parts  of  the  country.  From  these  reports, 
which  are  generally  quite  accurate,  the  experts  on  the 
board  of  trade  calculate  with  surprising  exactness  the 
size  of  the  crop  in  a  given  locality.  These  reports  are 
published  from  time  to  time,  and  with  them  the  estimates 
of  the  prospective  yield.  (4)  Any  current  news  may  in- 
fluence the  supply  which  indicates  either  an  increase  or 
a  diminution  in  the  amount  of  wheat  for  sale;  for 
example,  war  news  or  rumors  of  a  decline  in  ocean  rates, 
due  to  competition,  or  an  increase  or  diminution  of  the 
German  tariff  on  grain,  would  all  have  an  influence 
upon  the  estimates  of  supply.  (5)  The  condition  of  the 
money  market  has  an  important  bearing  upon  the  future 
supply.  Business  in  the  United  States  is,  as  we  have 
seen,  very  largely  transacted  on  borrowed  money.  Par- 
ticularly is  this  true  with  the  staple  commodities.  Aside 
from  the  great  army  of  speculators  who  buy  grain  or 
cotton  with  a  small  proportion  of  their  own  money,  and 
who  have  a  large  proportion  of  the  purchase  price 
borrowed  for  them  from  the  banks  by  brokers  who  give 
the  warehouse  receipts  for  the  grain  purchased  as  se- 
curity, there  are  the  large  manufacturers  and  dealers 
who  borrow  money  to  hold  or  "carry"  stocks  of  com- 
modities for  current  needs  or  for  future  requirements. 
If  money  rates  are  low,  and  if  loans  are  readily  made 
on  proper  security,  the  amount  of  this  buying  with 
borrowed  money  is  increased.     If,  on  the  other  hand, 

the  banks  are  reluctant  to  loan,  and  if  they  feel  that 
I— 11 


162  ECONOMICS 

they  have  sold  more  promises  to  pay  than  it  will  be 
convenient  for  them  to  meet,  they  may  refuse  to  lend, 
except  to  a  few  favored  borrowers,  and  may  also  refuse 
to  extend  those  loans  that  they  have  already  made.  A 
large  amount  of  bank  loans  are  also  made  on  "call," 
that  is  to  say,  the  bank  reserves  the  right  to  demand 
payment  at  any  time.  If  a  condition  of  the  money 
market  arises  in  which  banks  are  refusing  to  make  or 
renew  loans,  and  are  calling  loans  already  made,  the 
effect  is  instantly  to  increase  the  supply  offered  upon 
the  market  of  those  commodities  which  are  being  carried 
with  borrowed  money. 

A  man  borrows  for  two  reasons :  Either  to  buy  or  to 
keep  from  selling.  If  borrowing  is  made  difficult  or 
if  rates  of  interest  are  raised,  bids  to  purchase  at  a 
given  price  level  are  diminished  and  offers  to  sell  are 
increased.  A  most  important  element,  therefore,  of 
the  daily  calculations  of  a  produce  broker  is  the  condi- 
tion of  the  money  market. 

121.  Factors  influencing  demand. — ^Passing  now  to 
the  forces  of  influencing  demand,  we  have:  (1)  An 
increase  or  decrease  in  the  supply  of  other  grains,  such 
as  corn,  oats  or  rye,  which  may  be  substituted  for  wheat. 
A  decrease  in  the  corn  crop  means  that  there  will  be  an 
increased  consumption  of  wheat  for  some  of  the  pur- 
poses to  which  corn  would  otherwise  be  applied.  A 
fluctuation  in  the  yield  of  the  substitutes  for  wheat  has, 
therefore,  a  most  important  influence  upon  the  demand 
for  that  grain.  (2)  The  demand  for  wheat  is  in- 
fluenced by  any  change  in  the  money  market  which 
governs  the  amount  or  rate  of  bank  loans.  We  have 
already  discussed  this  factor  and  understand  its  influ- 
ence. When  loans  are  curtailed,  or  when  the  rate  of  in- 
terest rises,  buying  is  instantly  and  certainly  diminished, 


PRICES  163 

that  is  to  say,  the  demand  for  grain  weakens.  (3)  A 
change  in  the  purchasing  power  of  the  consumers  of 
wheat  may  have  an  important  influence  upon  its  de- 
mand. Wheat  is  mainly  consumed  in  the  form  of 
flour.  When  employment  is  abundant  and  wages  are 
high,  more  bread  is  sold  and  at  better  prices;  on  the 
other  hand,  during  periods  of  depression,  when  most 
people  are  economizing,  the  demand  for  flour  is  likely 
to  be  somewhat  weakened.  (4)  Any  change  in  the 
consumption  habits  of  the  flour  buyers  that  would  make 
flour  a  less  desirable  element  in  their  dietary  must  in- 
fluence the  demand.  An  example  of  this  is  the  intro- 
duction of  corn  meal  into  the  dietaries  of  Western 
Europe.  If  the  European  peasant  can  be  persuaded 
to  substitute  corn  meal  for  rye  and  wheat  flour,  the 
demand  for  wheat  and  rye  may  be  considerably  aflTected. 
(5)  Any  special  cause  may  influence  the  demand,  such 
as  the  outbreak  of  a  war,  which  would  increase  the  con- 
sumption of  flour  for  army  purposes. 

122.  Method  of  operation  of  these  factors. — ^Any 
one  of  these  causes  may  operate  upon  the  price  of  wheat. 
It  is  conceivable  indeed  that  all  these  causes  may  unite  to 
force  prices  up  or  to  force  them  down.  Usually,  how- 
ever, these  influences  pull  in  difl'erent  ways.  If  the 
crop  is  short  in  the  United  States,  it  is  Hkely  to  be  large 
in  the  Argentine  Republic;  or  a  stringency  in  the 
money  market  may  force  sales  sufficiently  to  ofl'set  the 
efl'ect  of  rumors  of  crop  failure,  or  rumors  of  a 
European  war  may  coincide  with  the  reports  of  a  large 
wheat  crop.  All  these  forces  which  have  been  men- 
tioned and  others  besides  them  are  constantly  in  opera- 
tion, and  the  price  of  wheat  on  any  given  day  is  the 
result  of  the  joint  operation  of  these  various  influences. 

These  price-making  influences  do  not  actually  come 


164  ECONOMICS 

into  operation  before  the  price  is  affected.  A  large 
number  of  dealers,  speculators  and  manufacturers  are 
constantly  endeavoring  to  foresee  the  operation  of  these 
forces,  and  either  to  buy  or  sell,  as  the  prospect  of  profit 
directs.  Months  before  the  harvest  the  amount  of  the 
harvest  has  been  forecasted.  If  the  crop  is  to  be  short, 
the  dealers  know  that  the  price  of  grain  will  rise,  and 
although  the  current  supply  of  wheat  may  not  be 
changed,  yet  in  anticipation  of  a  future  diminution  in 
the  supply  of  wheat,  the  price  of  wheat  is  instantly  ad- 
vanced. Competition  between  dealers  will  inevitably 
result  in  registering  the  effect  of  any  marked  influence 
upon  the  price  of  grain  as  soon  as  it  is  clearly  perceived. 
Our  analysis  of  the  influences  which  affect  the  price 
of  grain  might  be  duplicated  in  the  case  of  every  other 
conmiodity.  In  each  case,  there  are  the  same  influences 
operating  to  affect  the  supply  and  the  demand,  and  in 
each  case  the  results  of  the  interaction  of  these  in- 
fluences and  forces  is  a  particular  price  for  a  particular 
commodity  at  a  particular  time.  These  prices,  more- 
over, are  constantly  changing,  as,  in  the  estimate  of  the 
dealers,  one  influence  or  another  is  most  likely  to  be 
affected.  Nothing  is  more  irregular  and  unstable  than 
market  prices.  They  fluctuate  within  narrow  limits 
dozens  of  times  each  day,  and  considerable  changes,  ex- 
tending to  15  or  20  per  cent,  and  in  the  case  of  such 
commodities  as  iron  to  100  or  150  per  cent,  may  be 
accomplished  within  a  year. 

We  may  simply  say  that  under  the  pressure  of  an  exterior 
cause — competition — and  only  where  this  pressure  exists,  the 
cost  of  production  and  the  value  of  the  product  always  tend 
to  coincide.  This  relation  is  one  of  the  most  important  in 
political  economy,  but  it  does  not  by  any  means  indicate  the 
cause  of  value. 


PRICES  166 

In  a  word,  we  must  conclude  with  regard  to  exchange  value, 
as  well  as  with  regard  to  value  in  general,  that  it  is  fruitless  to 
seek  a  single  cause  or  basis.  The  best  way  out  of  the  difficulty, 
as  Stanley  Jevons  and  M.  Vilifredo  Pareto  have  proposed,  is 
to  remove  the  word  "value"  from  the  economic  vocabulary  and 
substitute  the  expression  "exchange  relation."  It  is  indeed  only 
a  relation ;  the  causes  of  this  relation  are  not  so  important  as 
the  conditions  which  it  must  fulfill.  These  conditions  may  be 
reduced  to  two,  which  together  are  necessary  and  sufficient : — 

( 1 )  The  current  price  must  be  such  that  demand  and  supply 
coincide  exactly,  for  it  is  evident  that  there  cannot  be  more 
merchandise  sold  than  bought,  nor,  inversely,  more  bought  than 
sold. 

(2)  The  current  price  must  be  such  that  all  parties  (sell- 
ers and  buyers),  even  the  least  favored,  secure  a  gain  in  utility. 
For  it  is  evident  that  if  there  is  not  an  advantage  of  some  sort  for 
both  parties  to  an  exchange,  the  transaction  will  not  take  place.  ^ 

123.  Utility  to  consumer  a  factor  in  determining 
price, — ^Although  market  prices  may  change  and  fluc- 
tuate in  the  manner  just  described,  they  are,  however, 
in  the  last  analysis,  determined  by  the  comparative 
utility  of  commodities  and  money  to  their  consumers. 
The  intending  purchaser  of  a  commodity  has  money. 
This  is  valuable  to  him  because  it  gives  him  command 
over  every  other  commodity.  He  is  offered  a  partic- 
ular commodity,  say  flour,  at  $5  a  barrel.  He  balances 
the  utility  of  $5  against  the  utility  of  the  other  com- 
modities that  $5  represents  to  him.  If  flour  is  indis- 
pensable to  him,  he  would  rather  pay  $10  or  $20  per 
barrel  than  go  without  it.  If,  however,  as  in  most 
cases,  the  commodity  is  not  indispensable,  he  may  reduce 
his  consumption  of  flour  to  a  half  barrel  and  buy  some- 
thing else  to  take  its  place.     This  tends  to  weaken  the 

1  Charles  Gide,  "  Principles  of  Political  Economy,"  Book  III,  Chapter  I, 
pp.  194,  195. 


166  ECONOMICS 

demand  for  flour  at  the  price  of  $5,  and  if  the  unwill- 
ingness to  pay  $5  is  general,  it  will  in  time  bring  down 
the  price  so  that  the  stocks  on  hand  can  be  disposed  of. 
The  upper  limit  of  any  price,  therefore,  is  the  utility 
of  a  given  supply  of  that  commodity  to  the  consumer, 
as  compared  with  the  utility  of  other  commodities  that 
money  will  command.  The  lower  limit  is  the  cost  of 
production  of  that  portion  of  a  given  supply  which  is 
produced  under  conditions  of  the  greatest  disadvan- 
tage. When  the  point  is  reached  in  the  decline  of  any 
price  where  a  large  number  of  the  producers  are 
operating  at  a  loss,  they  will  be  unable  to  continue  pro- 
ducing and  their  retirement  from  the  field  of  production 
will  curtail  the  output.  Unless  their  competitors  can 
make  up  the  deficiency,  the  supply  will  fall  off,  and 
as  a  result  the  price  will  be  raised  because  of  the  bidding 
that  takes  place  among  buyers  for  the  decreasing  out- 
put. 

A  good  illustration  of  the  effect  of  decHning  prices 
in  reducing  production  was  furnished  during  the  early 
90's  when  the  wheat  farms  of  Western  Kansas  and 
Nebraska,  where  wheat  growing  is  uncertain,  were 
abandoned  because  the  price  obtained  no  longer  paid 
the  expenses  of  production.  Another  illustration  was 
furnished  in  the  autumn  of  1893,  when  the  price  of 
silver  declined  some  40  per  cent  within  a  few  months. 
A  large  number  of  silver  mines  throughout  the  West 
and  in  other  countries  were  immediately  abandoned, 
and  had  it  not  been  for  the  fact  that  the  demand  for 
silver  was  permanently  reduced,  the  price  would  have 
advanced  as  a  result  of  the  decrease  in  supply.  To 
repeat,  the  upper  limit  of  price  is  the  utihty  of  a  com- 
modity offered  for  sale  as  compared  with  the  utility 
of  money  which  represents  all  other  commodities.     The 


PRICES  167 

lower  limit  is  the  cost  of  production  of  a  sufficient 
amount  of  the  commodity  to  influence  the  supply  on 
the  market.  The  actual  price  usually  lies  somewhere 
between  these  two  extremes. 

124.  Price  fluctuations  and  their  cause. — One  of  the 
most  interesting  phenomena  of  modern  times  has  been 
the  extensive  changes  that  have  taken  place  in  prices. 
Beginning  with  1850,  prices  of  all  commodities  all  over 
the  world  rose  until  1873.  From  that  time  until  the 
period  of  1893-96  prices  moved  with  few  interruptions 
steadily  downward  and  declined  almost  50  per  cent  from 
their  maximum  figures,  which  were  reached  in  1873. 
Since  1896  the  movement  of  prices  has  been  upward. 
The  primary  cause  of  these  extensive  fluctuations  in 
prices  was  a  progressive  and  long-continued  alteration 
in  the  relations  between  the  amount  of  the  medium  of 
exchange,  composed  of  money  and  credit,  as  we  have 
already  described,  and  the  amount  of  commodities  of- 
fered for  sale.  The  production  of  gold  for  many  years 
after  1873,  owing  to  certain  peculiar  difficulties  attach- 
ing to  that  industry,  failed  to  increase  on  the  same 
scale  as  the  production  of  wheat,  iron,  coal  and  other 
commodities.  Owing  to  the  fact  that  the  production 
of  gold  limits  the  amount  of  promises  to  pay  gold  and 
the  amount  of  credit  that  can  be  issued  by  the  govern- 
ment and  banks  to  serve  as  the  medium  of  exchange, 
the  result  of  this  relative  decline  in  the  production  of 
gold  was  that  the  commodities  that  were  exchanged 
for  money  increased  more  rapidly  than  the  supply  of 
the  medium  of  exchange.  In  consequence  we  experi- 
enced a  prolonged  and  severe  fall  of  prices  from  1873 
to  1896.  This  fall  of  prices  was  more  disastrous  be- 
cause it  followed  twenty-three  years  of  rising  prices 
from  1850  to  1873.     During  this  period  the  produc- 


168  ECONOMICS 

tion  of  gold  increased  more  rapidly  than  the  production 
of  the  commodities  that  were  exchanged  for  money. 
As  a  result  of  the  increase  in  the  production  of  gold, 
the  supply  of  all  kinds  of  promises  to  pay  gold  in- 
creased with  great  rapidity,  and  the  medium  of  ex- 
change was  largely  expanded.  The  consequence  was 
that  the  value  of  money,  measured  in  terms  of  the 
commodities  for  which  money  was  exchanged,  rapidly 
declined.  In  other  words,  prices  rapidly  advanced. 
Since  1896,  again,  as  a  direct  result  of  the  rapid  in- 
crease in  the  production  of  gold,  the  movement  in  the 
medium  of  exchange  has  overtaken  and  passed  the 
increase  in  the  production  of  commodities,  and  we  have 
seen  again  the  phenomenon  of  rising  prices  that  we 
experienced  from  1850  to  1873. 

These  prolonged  changes  in  prices  affecting  all  com- 
modities in  the  same  direction,  although  not  of  course 
to  the  same  extent,  are  likely  to  be  experienced  so  long 
as  business  is  transacted.  Since  all  commodities  are 
produced  to  be  exchanged  for  the  medium  of  exchange, 
and  since  the  primary  use  of  the  standard  metal  is  to 
be  exchanged  against  commodities,  the  value  of  money 
in  terms  of  commodities  and  the  value  of  commodities 
in  terms  of  money  will  continue  to  be  influenced  in  the 
long  run  by  their  relative  supplies.  First,  the  produc- 
tion of  gold,  and  then  the  production  of  commodities 
will  increase  the  more  rapidly,  and  prices  will  rise  or 
fall  to  correspond.  A  price  movement  requires  a  num- 
ber of  years  for  its  completion  but  what  the  business 
man  is  primarily  concerned  with  is  the  weekly,  monthly 
and  yearly  movement  of  prices,  and  it  is  with  these 
movements  that  we  have  chiefly  concerned  ourselves. 


CHAPTER  VI 

INTERNATIONAL  EXCHANGE 

125.  International  payments. — If  we  take  the  sta- 
tistics of  merchandise  exports  and  imports  of  the  United 
States  for  the  ten  years  ending  with  1912,  we  find  that 
they  amount,  in  the  aggregate,  to  over  thirty  billions 
of  dollars.  This  enormous  amount  of  money  repre- 
sents the  total  purchases  and  sales  of  the  United  States. 
Every  one  of  these  transactions  was  made  in  terms  of 
money — American  dollars,  English  pounds  sterling, 
French  francs,  etc. 

The  only  money  recognized  in  international  trade  is 
gold.  Outside  of  the  country  which  uses  it  no  form 
of  token  or  representative  money  or  bank  notes  passes 
current.  These  vast  transactions  were,  therefore,  ex- 
pressed in  terms  of  gold.  Since  they  represented  bona 
fide  sales  for  which  purchasers  were  obliged  to  pay,  and 
since  they  were  between  citizens  of  the  United  States 
and  citizens  of  other  countries,  we  would  naturally  ex- 
pect to  find  a  large  movement  of  gold  exported  and 
imported  in  settlement. 

On  examining  the  statistics  of  the  exports  and  im- 
ports of  gold,  however,  we  find  that  their  total  amount 
during  this  period  was  only  $1,540,000,000,  or  about 
one-twentieth  of  the  total  purchases  and  sales.  It  is 
evident  that  these  enormous  transactions  were  settled 
in  some  other  way  than  by  the  shipment  of  gold  coin 
and  buUion  back  and  forth  across  the  ocean.     The  man- 

169 


170  ECONOMICS 

ner  in  which  this  settlement  is  made  we  shall  consider 
under  the  head  of  the  International  Exchanges. 

126.  Domestic  exchange. — Let  us  begin  our  discus- 
sion by  examining  the  situation  in  local  exchange.  We 
have  already  seen  that  different  cities  and  localities  are 
specialized  to  the  production  of  particular  commodities. 
For  example,  Fall  River,  Massachusetts,  is  almost  en- 
tirely devoted  to  the  production  of  cotton  goods;  Kan- 
sas City,  Missouri,  is  a  centre  of  the  meat  and  grain 
industries;  Pittsburgh  specializes  in  iron  and  steel. 
We  may,  without  departing  too  far  from  reality,  speak 
of  Fall  River  as  a  cotton  city,  Pittsburgh  as  a  steel 
city  and  Kansas  City  as  a  meat  and  grain  city.  The 
other  industries  carried  on  in  these  several  communities 
are,  compared  with  their  leading  activity,  unimportant. 
The  people  of  each  of  these  cities  buy  everything  which 
is  produced;  all  kinds  of  commodities  ready  for  the 
consumer,  as  well  as  enormous  quantities  of  raw  ma- 
terial and  machinery.  Each  of  these  cities,  in  other 
words,  draws  upon  the  whole  world  to  supply  its  de- 
mands, importing  every  year  from  every  part  of  the 
world  thousands  of  commodities.  How  are  these  com- 
modities paid  for? 

Our  study  of  the  deposit  currency  supplies  us  the 
answer.  The  Fall  River  mills  are  continually  selling 
cotton  cloth  to  all  parts  of  the  world;  Pittsburgh  is 
selling  iron  and  steel;  Kansas  City  grain  and  meat. 
These  commodities  are  paid  for  by  checks,  drafts,  bills 
of  exchange,  which  are  deposited  in  the  banks  of  these 
three  cities,  and  the  proceeds  collected  in  the  regular 
way.  Out  of  these  bank  deposits  is  paid,  directly  or 
indirectly,  all  the  indebtedness  of  the  business  men  of 
Fall  River,  Pittsburgh  and  Kansas  City  to  the  people 


INTERNATIONAL  EXCHANGE  171 

who  work  for  them  and  who  sell  them  goods,  and  so 
these  deposits  furnish  the  inhabitants  of  these  cities 
with  the  means  of  paying  for  all  the  commodities  which 
are  imported  for  their  use.  These  payments  are  made 
by  checks  and  drafts  drawn  on  the  deposits  in  the  banks 
of  these  cities.  They  may  be  deposited  in  the  bank  by 
manufacturers  and  dealers  who  have  sold  cotton  cloth, 
steel,  grain  or  meat,  to  purchasers  residing  in  all  parts 
of  the  world,  or  by  store  keepers  and  other  local  bus- 
iness men  who,  as  we  have  already  seen,  have  received 
payment  out  of  the  money  which  the  manufacturers 
and  dealers  have  paid  out,  and  which  has  been  taken 
from  their  deposits  in  the  banks.  These  deposits  orig- 
inated in  the  sale  of  cotton  cloth,  steel,  grain  and  meat. 
We  reach  then  the  conclusion  that  Fall  River  pays  for 
aU  her  imports  with  the  cotton  cloth  which  her  manu- 
facturers export;  that  the  steel  exports  of  Pittsburgh 
pay  for  all  the  commodities  shipped  into  that  city,  and 
that  the  grain  and  meat  which  Kansas  City  is  constantly 
exporting  serves  to  furnish  the  means  of  payment 
for  all  the  imports  into  Kansas  City. 

127.  A  similar  method  employed  in  the  international 
exchanges. — If  the  steps  leading  up  to  this  conclusion 
are  clear,  it  will  not  be  difficult  to  understand  the  proc- 
ess of  liquidating  the  various  obligations  which  arise 
in  the  course  of  international  exchange  without  the 
shipment  of  more  than  a  small  percentage  of  the  money 
which  these  transactions  represent.  If  the  explanation 
of  the  process  of  domestic  exchange  has  been  under- 
stood, we  can  understand  why  the  United  States  can, 
within  ten  years,  do  thirty  billion  dollars  of  international 
business  while  exporting  and  importing  only  $1,540,- 
000,000  of  gold. 


17«  ECONOMICS 

The  explanation  is  briefly  this:  the  United  States 
pays  for  her  imports  with  her  exports.  This  transac- 
tion is  accomphshed  in  almost  exactly  the  same  method 
as  that  which  is  employed  in  the  settlement  of  inter- 
nal obligations.  The  leading  exports  from  the 
United  States  are  food-stuiFs,  cotton,  manufactured 
commodities,  mainly  iron  and  steel,  petroleum  and  lum- 
ber. The  leading  imports  are  sugar,  coffee,  india  rub- 
ber, wool,  hides  and  a  great  variety  of  products  ready 
for  consumption.  Every  sale  of  wheat  or  cotton  by  an 
American  exporter  entitles  the  exporter  to  receive  a 
certain  amount  of  money  in  the  country  to  which  the 
shipment  goes.  Every  purchase  by  an  American  im- 
porter obligates  the  importer  to  pay  a  certain  sum  of 
money  in  the  country  in  which  he  has  made  his  purchase. 
The  exporter,  therefore,  since  he  has  the  right  to  receive 
money  in  Liverpool,  draws  a  draft  on  the  English  pur- 
chaser of  the  grain,  instructing  him  to  pay  to  the  per- 
son named  in  the  draft,  say  <£l,000  ($4,865).  He 
takes  this  draft  to  a  banker  who  has  a  correspondent 
or  a  branch  in  Great  Britain,  and  after  endorsing  it 
and  attaching  the  invoice,  bill  of  lading  and  the  marine 
insurance  policy,  he  sells  it  to  the  banker  who  charges 
him  a  small  amount  for  the  service.  He  pays  him 
the  $4,865  (£1,000)  to  which  he  is  entitled  in  Liver- 
pool, less  a  small  amount  as  his  profit.  In  this  way  the 
exporter  is  receiving  his  money  immediately,  when  in 
the  absence  of  some  such  arrangement  he  would  be 
obliged  to  wait  for  the  delivery  of  the  goods  and  the 
shipment  to  him  by  his  Liverpool  debtor  of  the  amount 
of  his  purchase  price  in  gold.  The  banker  who  has 
paid  this  bill  sends  it  abroad  to  his  English  correspond- 
ent, who  presents  it  to  the  purchaser  of  the  grain  for 
payment.     When  the  bill  is  paid  the  proceeds  are  de- 


INTERNATIONAL  EXCHANGE  173 

posited   in   England  to   the   credit   of   the   American 
banker. 

128.  Essential  elements  of  the  transaction. — Now 
observe  how  this  export  of  grain  is  utihzed  to  pay  for 
an  importation.  At  the  same  time  that  the  banker  has 
purchased  from  the  exporter  of  grain  the  right  to  re- 
ceive <£l,000  in  Liverpool  as  the  purchase  price  of  the 
grain,  the  American  importer  of  cloth  has  agreed  to 
pay  in  Liverpool  the  same  amount,  £1,000.  He  can 
pay  this  in  one  of  two  ways:  either  by  drawing  from 
his  bank  the  amount  of  gold  represented  by  his  debt 
and  shipping  this  on  a  fast  steamer  at  a  cost  of  about 
2.43  cents  for  each  $4.86  which  he  sends,  or  he  can  buy 
from  an  international  banker  the  right  to  receive 
<£l,000  in  England,  expressed  in  the  form  of  a  draft 
by  the  banker  on  his  English  correspondent,  and  he 
can  send  this  draft  to  his  English  creditor,  who  will 
collect  it  from  the  banker  on  whom  it  was  drawn  and 
obtain  his  money.  The  second  method  is  almost  in- 
variably chosen.  The  American  banker  has  a  credit 
with  his  English  correspondent  as  a  result  of  the  col- 
lection of  the  bill  of  exchange  drawn  against  the  export 
of  grain  for  £1,000.  He  is,  therefore,  in  a  position 
to  sell,  of  course,  at  a  profit  to  himself,  a  bill  against 
that  correspondent.  This  is  purchased  by  the  Amer- 
ican importer  of  cloth,  who  straightway  sends  it 
through  the  mail  to  the  Englishman  from  whom  he  has 
made  his  purchase.  The  English  exporter,  as  soon  as 
he  receives  the  bill,  deposits  it  with  his  own  bank  to 
be  collected  from  the  bank  on  which  it  was  drawn. 
Therefore  the  export  of  grain  paid  for  the  import  of 
cloth  and  no  money  passed  between  the  two  countries 
in  a  transaction  involving  approximately  $10,000. 

129.  International  dvchange  an  offsetting  of  credits. 


174  ECONOMICS 

— It  is  in  this  manner  that  international  indebtedness 
is  settled.  Those  who  have  rights  to  receive  money  in 
England,  France  and  Germany  and  in  every  country 
with  which  the  United  States  has  dealings,  sell  these 
rights  to  receive  money  to  international  bankers.  The 
drafts  so  purchased  by  the  bankers  are  sent  abroad  to 
their  correspondents  for  collection  and  the  proceeds  are 
deposited  to  their  credit.  All  those  Americans  who 
have  money  to  pay  abroad  for  any  reason  obtain  the 
means  of  payment  from  these  same  international  bank- 
ers who  sell  them  drafts  upon  their  foreign  correspond- 
ents entitling  them,  when  the  drafts  are  presented,  to 
receive  money  in  the  currency  of  the  country  where 
they  have  payments  to  make.  It  is  with  these  drafts 
that  foreign  payments  are  made. 

There  is  no  essential  diiFerence,  then,  between  the 
method  of  settling  foreign  transactions  and  those  which 
are  employed  in  domestic  business.  Every  city  in  the 
United  States  pays  for  what  it  consumes  by  checks 
and  drafts  drawn  against  deposits  in  its  banks,  which 
deposits  have  originated  in  the  sale  of  commodities 
which  it  has  exported.  So  every  country  in  its  dealings 
wdth  the  outside  world  settles  its  obligations  by  drafts 
against  credits,  which  originate  for  the  most  part  in 
shipments  of  merchandise,  and  as  in  domestic  transac- 
tions, it  is  only  the  balance  which  remains  after  offsetting 
the  credits  of  a  city  against  its  debits  which  is  sent  to 
it  or  received  from  it  in  actual  currency,  so  in  inter- 
national transactions,  the  exports  and  imports  of  gold 
are  small  because  they  represent  merely  the  amount  of 
international  indebtedness  which  is  not  balanced  by  in- 
ternational credits. 

130.  Other  sources  of  bills  of  exchange. — Up  to  this 
point  in  our  discussion  of  international  payments,  we 


INTERNATIONAL  EXCHANGE  176 

have  assumed  that  these  originate  in  the  sales  of  com- 
modities. There  are,  however,  many  other  sources  of 
United  States  indebtedness  to  the  world  and  of  the 
world's  indebtedness  to  the  United  States.  Americans 
under  normal  conditions  spend  in  foreign  travel  about 
one  hundred  and  fifty  miUion  dollars  a  year.  This  ex- 
pense must  be  paid  by  the  purchase  of  bills  of  exchange 
in  the  United  States  drawn  against  American  credits  in 
Europe.  American  corporations  have  obtained  large 
amounts  of  money  to  invest  in  various  enterprises  from 
European  investors.  The  interest  on  these  European 
investments  in  the  United  States  amounts  to  a  large 
sum  which  must  be  paid  by  the  purchase  of  drafts  in 
the  United  States. 

Again,  nearly  all  the  foreign  trade  of  the  United 
States  is  carried  on  by  vessels  which  are  owned  by 
foreign  countries.  The  freight  charges  on  our  foreign 
trade,  therefore,  must  be  paid  abroad,  and  these  pay- 
ments are  made  in  the  same  manner  by  the  purchase 
of  bills  of  exchange  in  the  United  States.  As  a  result 
of  these  payments  which  are  made  in  addition  to  the 
obHgations  incurred  on  account  of  the  purchase  of 
foreign  merchandise,  it  is  necessary  for  the  United 
States  to  export  a  much  greater  value  in  commodities 
than  is  imported.  Europeans  do  not  travel  largely  in 
the  United  States.  The  American  merchant  marine 
performs  few  services  for  Europe,  and  American 
investments  in  Europe  are  trifling.  We  have,  there- 
fore, to  receive  very  little  money  on  these  accounts, 
while  our  payments  for  these  purchases  are  enor- 
mous. 

131.  ^  large  surplus  of  commodities  must  he  ex- 
ported.— It  is  necessary,  therefore,  that  the  United 
States  should  export  commodities  sufficient  in  value, 


176  ECONOMICS 

not  merely  to  balance  the  importations  of  foreign  mer- 
chandise, but  also  to  give  to  the  bankers  of  this  country, 
credits  against  which  they  can  sell  bills  of  exchange 
in  sufficient  amount  to  meet  the  expense  of  American 
travel  in  Europe,  interest  and  dividends  paid  to  for- 
eigners and  a  large  part  of  the  charges  on  American 
foreign  trade.  We  find  this  conclusion  borne  out  by 
the  statistics  of  our  foreign  trade.  From  1903  to  1912, 
the  period  previously  examined,  the  excess  of  exports 
over  imports,  gold  shipments  being  included,  was 
$4,405,228,401,  which  was  approximately  the  amount  of 
foreign  obligations  due  to  Americans  in  excess  of  the 
amount  of  their  indebtedness  on  account  of  merchandise 
purchased  from  foreign  countries.  This  difference  be- 
tween exports  and  imports  is  found  in  the  foreign  trade 
statistics  of  every  country.  In  England,  for  example, 
the  balance  is  in  favor  of  imports.  England  has  enor- 
mous investments  in  foreign  countries  and  the  interest 
and  dividends  on  these  investments  must  be  sent  to 
her  in  the  form  of  bills  of  exchange  drawn  against  im- 
portations of  merchandise  into  England,  from  which 
the  countries  who  send  them  will  receive  no  other 
payment  than  the  discharge  of  their  obligations  in- 
curred on  account  of  interest,  dividends  and  carrying 
charges.  We  are  not  here  considering  the  abnormal 
conditions  induced  by  the  great  European  war. 

132.  The  international  income  account. — On  the  basis 
of  the  foregoing  discussion  it  will  be  possible  to  under- 
stand what  is  known  as  the  international  income  ac- 
count, which  should  be  headed  "The  United  States  in 
Account  with  Foreign  Countries."  This  account  takes 
into  consideration  not  only  the  imports  and  exports  of 
merchandise  and  gold,  but  also  all  other  transactions 
giving  rise  to  debts  between  nations,  as  follows : 


INTERNATIONAL  EXCHANGE  177 

DEBIT.  CREDIT. 

Imports  of  merchandise  Exports  of  merchandise. 

Payments  of  interest  and  dividends  Payments  of  interest  and  dividends 

on    American    bonds    and    stocks  on  European  securities  owned  by 

held  in  Europe.  Americans, 

Freight  and  passenger  charges  paid  Expenses    of    European    travel    in 

to  foreign  vessel  owners.  the  United  States. 

Expenses    of    American    travel    in  Loans  made  to  bankers  and  others 

Europe.  in  the  United  States. 

Payment  of  foreign  loans.  Purchase  of  American  securities. 

Purchase  of  foreign  securities.  Remittances    to   immigrants    in   the 

Remittances     by     European     immi-  United  States. 

grants  into  the  United  States  to 

their  friends  left  at  home. 

On  the  debit  side  of  this  account  appears  all  the  pay- 
ments which  citizens  of  the  United  States  are  obligated 
to  make  to  citizens  of  foreign  countries,  grouped  under 
their  leading  classes.  On  the  credit  side  appears  a 
classified  description  of  the  payments  which  citizens  of 
the  foreign  countries  are  obligated  to  make  to  citizens 
of  the  United  States.  The  leading  items  have  already 
been  mentioned,  but  we  will  repeat  them  in  a  brief  ex- 
planation of  this  statement.  On  the  debit  side  there 
are  imports  of  merchandise,  payments  of  interest  and 
dividends  on  American  stocks  and  bonds  held  in  Eu- 
rope; freight  and  passenger  charges  paid  to  foreign 
vessel  owners,  and  expenses  of  American  travel,  the 
payment  of  foreign  loans,  purchase  of  foreign  securi- 
ties and  remittances  by  European  immigrants  into  the 
United  States  to  their  friends  left  at  home.  Obliga- 
tions under  each  one  of  these  heads  must  also  be  dis- 
charged by  the  purchase  of  bills  of  exchange  drawn 
against  credits  established  by  American  bankers  abroad. 
An  interesting  portion  of  the  study  of  foreign  ex- 
change concerns  the  causes  which  influence  the  prices  of 
foreign  bills.  These  causes  are  described  by  Lord  Gos- 
chen  in  his  "Foreign  Exchanges,"  as  follows: 

1—12 


178  ECONOMICS 

When  the  foreign  exchanges  are  in  actual  operation,  and  ad- 
justments of  accounts  are  taking  place  between  different  coun^ 
tries,  it  appears  at  once  that,  though  the  purchase  and  sale  of 
foreign  bills  originally  represent  a  simple  transfer  of  debt,  and 
thus,  at  first  sight  seem  to  exclude  the  idea  of  varying  prices, 
the  value  of  these  bills  is,  nevertheless,  in  a  state  of  constant 
fluctuation.  The  enumeration  of  the  various  elements  of  value 
which  determine  these  differences  in  price  forms  the  next  step 
in  our  inquiry,  and  is  rendered  possible  by  the  fact  that,  while 
every  instance  of  such  variations  admits  of  a  special  practical 
explanation,  all  are,  nevertheless,  subject  to  well  defined  gen- 
eral laws,  and  capable  of  scientific  analysis. 

The  primary  difference  of  value  clearly  arises,  as  was  previ- 
ously pointed  out,  either  from  the  aggregate  amount  of  the 
claims  of  any  given  country  upon  others  exceeding  the  sum  of 
its  liabilities  to  them,  or,  vice  versa,  falling  short  of  that  sum. 
In  the  first  case,  those  who  have  bills  to  draw  (whom  for  the 
sake  of  conciseness  we  will  call  the  exporters,  though  the  class 
embraces  all  those  who  have  claims  of  any  kind  on  foreign 
countries)  will  not  find  sufficient  purchasers  to  take  all  their  bills ; 
for  only  those  will  buy  who  have  debts  abroad  to  settle,  and 
these  debts  are  by  our  hypothesis  of  less  amount  than  the  claims. 
Accordingly  the  exporters,  competing  with  each  other  for  the 
sale  of  the  bills,  will  take  less  money  for  them  than  their  nominal 
par  value ;  that  is  to  say,  will  sell  them  at  a  discount.  In  the 
second  case,  the  importing  class,  those  who  have  incurred  liabil- 
ities to  foreigners,  having,  by  our  hypothesis,  larger  remit- 
tances to  make  than  the  exporters  can  supply  to  them,  bid 
against  each  other  for  such  bills  as  may  be  got,  and  pay  a 
premium  to  secure  them.  In  both  cases,  what  exporters  and  im- 
porters are  seeking  to  avoid  is  the  transmission  of  bullion,  with 
all  the  sacrifices  thereby  entailed,  and  accordingly  the  extent  of 
the  premium  or  discount  which  can  be  given  is  determined  by 
the  extent  of  these  sacrifices.  Let  us  suppose  that  importers 
foresee  that  the  bills  which  they  will  be  able  to  procure,  will 
not  suffice  for  all  the  payments  which  they  have  to  make.  They 
at  once  become  aware  that  the  balance  will  have  to  be  remitted 


INTERNATIONAL  EXCHANGE  179 

in  bullion;  and  each  individual,  to  avoid  this  necessity  falling 
to  his  share,  hastens  to  offer  a  slight  premium  to  those  who 
draw,  intending  by  this  small  sacrifice  to  secure  himself  against 
the  greater  loss  in  freight,  insurance  and  interest,  which  is  al- 
ways involved,  in  the  remittance  of  bullion.  The  premium  may 
rise  to  within  a  fraction  of  this  expense  or  loss ;  nay,  may  even 
reach  that  actual  point ;  because  though  the  premium  be  paid  for 
the  bill  and  the  cost  of  specie  remittance  were  absolutely  equal, 
it  would  still  be  more  convenient  to  send  the  bill.  Beyond  this 
point  the  balance  of  trade  cannot  cause  the  premium  to  rise,  nor 
on  the  other  hand,  can  it  cause  the  discount  at  which  bills  are 
sold  to  exceed  the  sacrifices  which  exporters  would  incur,  if  they 
found  themselves  obliged  to  instruct  their  foreign  debtors  to 
send  them  bullion,  in  consequence  of  bills  upon  them  no  longer 
being  saleable.  The  time,  however,  when  they  would  receive 
payment  would,  in  this  case,  be  an  important  consideration.  As 
long  as  the  exporters  can  find  purchasers  for  their  bills,  they 
get  payment  at  once ;  but  when  they  cannot  dispose  of  their 
bills  anymore,  they  are  not  reimbursed  for  the  value  of  their 
exports  till  the  equivalent  for  them  is  returned  in  gold.  Ac- 
cordingly each  individual  will  submit  to  a  sacrifice  in  order  to 
sell  his  bills  before  the  demand  for  them  is  exhausted,  but  the 
discount  will  not  be  greater  than  the  estimate  which  the  seller 
makes  of  the  sacrifices  which  have  been  pointed  out.  The  re- 
sult becomes  perfectly  clear  when  stated  in  actual  figures,  espe- 
cially if  an  illustration  can  be  found  where  the  par  value  of  the 
bills  drawn  between  two  commercial  centers  is  not  hidden  or  ren- 
dered more  complicated  by  differences  of  currency.  New 
Orleans  and  New  York,  before  the  secession,  when  their  respec- 
tive currencies  had  not  been  disturbed  and  divided  by  independ- 
ent issues  of  inconvertible  paper  money,  supplied  an  instance  in 
point.  Under  the  hypothesis  of  an  identical  currency,  if  at 
any  time  the  amount  of  bills  on  New  York  offered  for  sale  in 
New  Orleans  equalled  the  amount  of  remittances  required  for 
the  payment  of  debts  due  to  New  York — that  is  to  say,  if  the 
indebtedness  of  the  two  cities  reached  a  point  of  equilibrium — 
the  price  to  be  paid  for  a  bill  for  one  hundred  dollars  payable 


180  ECONOMICS 

in  New  York  at  sight  (for  differences  in  point  of  time,  and 
consequently  interest,  should  at  this  stage  be  eliminated),  would 
be  exactly  one  hundred  dollars.  In  proportion,  however,  as  it 
might  become  evident,  that  a  greater  sum  was  due  New  York 
than  could  be  drawn  against  the  claims  of  New  Orleans  upon 
that  city,  those  who  were  bound  to  remit  would  hasten  to  pay 
a  small  premium  to  the  drawers,  and  give  them  one  hundred 
dollars  and  a  half,  under  the  apprehension  that  if  they  did  not 
secure  these  bills,  they  might  be  obliged  to  send  gold,  which 
might  cost  them  one  and  a  half  dollar  for  each  one  hundred 
dollars  in  freight  and  insurance.  Thus  the  more  clearly  it  ap- 
peared that  the  stock  of  bills  was  growing  insufficient,  and  the 
more  the  supply  actually  diminished — the  higher  the  premium 
was  sure  to  rise,  till  the  sellers  might  realize  almost  one  and  a 
half  dollar  profit.  At  this  point  the  profit  was  clearly  so  high, 
that  it  would  be  indifferent  to  the  remitters  whether  they  bought 
bills  or  sent  the  gold,  and  some  would  dispatch  gold  and  others 
would  send  bills,  the  surplus  excess  required  to  be  remitted  be- 
ing in  the  meantime  gradually  lessened  by  this  dispatch  of  gold. 
The  exporters  being  less  pressed  for  their  bills,  soon  had  the 
opportunity  of  feeling  the  change  in  the  situation,  and  might 
content  themselves  with  a  smaller  premium  in  order  to  secure 
some  profit  before  the  demand  was  entirely  satisfied.  The  result 
would  be  a  fall  in  the  price  of  bills,  till  the  exchange  stood 
once  more  at  par,  or  below  it.  Conversely,  if  at  any  time  there 
were  more  bills  than  purchasers  for  them,  the  drawers  feeling 
that  their  export  business  might  have  to  bear  the  charge  of 
one  and  a  half  per  cent  for  bullion  shipped  to  them  from  New 
York  as  returns,  were  ready  to  sell  at  a  discount  long  before 
that  point  was  reached;  a  discount  would,  however,  not  exceed 
the  charges  on  bullion  shipments,  which,  in  the  case  in  point, 
we  have  supposed  to  be  one  and  a  half  per  cent.  It  is  a  clear 
deduction  from  these  considerations,  that  the  limits  within  which 
the  exchanges  may  vary  (provided  the  bills  are  drawn  at  sight 
and  in  the  same  currency),  are,  at  the  one  extreme,  the  par 
value  plus  the  cost  of  transmission  of  bullion ;  at  the  other 
extreme,  the  par  value  minus  this  identical  sum.     Practically 


INTERNATIONAL  EXCHANGE  181 

the  exchanges  rarely  touch  either  extreme,  but  fluctuate  between 
them,  owing  to  the  various  measures  and  influences  brought  to 
bear  upon  the  situation  before  the  extreme  case  arrives,  which 
cause  a  reaction  in  the  opposite  direction. 


PART  III:    DISTRIBUTION 

CHAPTER  I 

FORMS  OF  OWNERSHIP 

133.  Four  interests  in  every  business. — The  three  fac- 
tors in  production — natural  agents,  labor  and  capital — 
were  originally,  in  a  primitive  state  of  society,  united 
under  the  control  of  single  producers.  Even  to-day 
we  find  numerous  examples  of  this  union.  The  farmer 
and  the  blacksmith  unite  the  three  factors  of  produc- 
tion, and  a  large  number  of  small  manufacturers  and 
traders  do  the  same.  When  industry  is  conducted 
on  a  large  scale,  however,  as  modern  industry  almost 
universally  is,  the  ownership  of  the  factors  in  produc- 
tion is  separated.  One  man  owns  the  land  on  which 
the  factory  is  erected;  another  man  furnishes  the  funds 
to  build  and  equip  the  plant  and  to  finance  its  operation. 
The  labor  is  supplied  by  a  third  set  of  men,  and  the 
owners  of  the  business,  who  take  the  risks  and  receive 
the  profits,  constitute  the  fourth.  These  four  interests 
are  found  in  every  large  business. 

134.  The  entrepreneur. — We  find  that  the  conduct  of 
production  is  to-day  in  charge  of  business  management 
called  entrepreneurs.  The  English  equivalent  of  this 
word  is  undertaker.  The  entrepreneur  is  the  man  who 
undertakes  the  conduct  and  the  responsibility  of  produc- 
tion. These  men  buy  or  hire  land  or  natural  resources, 
they  employ  labor  and  they  use  either  their  own  funds 
or  the  funds  that  they  borrow  to  erect  and  equip  build- 

182 


FORMS  OF  OWNERSHIP  188 

ings,  buy  materials  and  operate  their  farms,  factories, 
shops  or  mines.  They  own  the  product  and  they  sell 
this  on  the  best  terms  obtainable,  thus  replenishing  their 
funds  which  are  constantly  being  invested  in  wheat, 
cotton  cloth,  pig  iron,  coal  and  wages,  in  order  to  carry 
on  the  productive  process.  The  entrepreneur  assumes 
all  the  risks  of  being  able  to  sell  his  product  at  a  price 
exceeding  the  cost  of  production.  He  determines  what 
goods  shall  be  produced,  in  what  quantities  and  at  what 
places.  Through  his  hands,  every  other  member  of  the 
community,  from  the  richest  bondholder  to  the  poorest 
laborer,  receives  his  income.  The  entrepreneur,  in  other 
words,  although  he  is  working  for  his  own  profit,  dis- 
tributes the  income  of  society,  and  it  is  from  his  stand- 
point that  we  must  consider  the  operation  of  distribu- 
tion. 

135.  Three  form's  of  entrepreneur. — There  are  three 
forms,  in  the  eyes  of  the  law,  which  the  entrepreneur 
may  assume.  First,  the  individual;  second,  the  part- 
nership, and  third,  the  corporation.  Everyone  can  call 
to  mind  some  very  large  individual  owners.  John 
Wanamaker  of  Philadelphia,  and  the  late  Marshall 
Field  of  Chicago,  are  conspicuous  illustrations  of  great 
business  responsibilities  largely  assumed  by  single 
owners.  There  are  two  reasons  why  individual  owner- 
ship is  undesirable.  One  of  these  reasons  is  that  the 
credit  of  the  concern  is  always  higher  in  a  partnership 
than  in  the  case  of  an  individual  owner,  and  the  other 
is  the  necessity  that  there  shall  be  a  number  of  partners 
as  the  business  grows  so  that  they  can  constitute  an 
organization  and  give  undivided  attention  to  various 
departments  of  the  business  in  a  way  a  single  individ- 
ual cannot. 

136.  The  partnership, — ^A  partnership  is  formed  by 


184  ECONOMICS 

the  association  of  two  or  more  persons  for  carrying  on 
business,  and  dividing  profits  between  them.  The 
members  of  the  partnership  are  called  partners  and  the 
partners  constitute  the  firm.  Partnership  is  the  result 
of  an  executed  contract  between  the  members.  This 
contract  may  be  either  written  or  oral.  Of  course,  if 
oral,  it  must  be  substantiated  by  evidence.  The  written 
agreement  is  known  as  the  articles  of  copartnership. 
It  is  usually  arranged  under  the  following  general 
heads:  First,  the  name  of  the  partners;  second,  what 
the  capital  shall  consist  of  and  the  respective  contribu- 
tions; third,  the  definition  of  the  objects  and  purposes  of 
the  partnership;  fourth,  the  right  of  each  one  to  draw 
out  certain  sums  for  his  own  expenses;  fifth,  the  book- 
keeping and  accounting;  sixth,  any  special  permissions 
or  prohibitions  such  as  not  allowing  either  partner  to 
make  or  endorse  accommodation  paper. 

137.  Kinds  of  partners. — There  are  various  kinds  of 
partners-;  first,  the  public  or  open  partner;  second,  the 
secret  partner;  third,  the  nominal  partner;  fourth,  the 
silent  partner,  and  fifth,  the  special  partner.  These 
distinctions  are  very  vital  to  the  partners,  but  they 
amount  to  little  as  between  the  partners  and  the  public. 
The  general  rule  is  that  the  liability  of  a  partner  is 
absolute,  if  you  can  get  at  him.  The  definition  of  a 
partner  is  anyone  who  has  an  intention  to  share  in  the 
profits  and  losses  of  a  business.  He  is  a  party  to  the 
contract,  he  has  a  voice  in  the  direction  and  control  of 
the  business,  and  he  is  the  one  who  invests  his  capital 
and  labor  in  the  undertakings. 

A  partner  has  certain  rights ;  they  are,  first,  the  right 
of  choosing  his  associates.  A  result  of  that  general 
rule  is  that  an  interest  in  a  partnership  cannot  be  pur- 
chased by  an  outsider  without  the  consent  of  all  the 


FORMS  OF  OWNERSHIP  185 

partners.  Second,  he  has  the  right  to  participate  in  the 
management  of  the  business.  Third,  he  has  the  right  to 
sell  any  part  of  the  property  which  is  kept  for  the  pur- 
poses of  the  partnership,  but  he  has  no  right  to  sell  any 
property  which  is  not  intended  to  be  sold. 

A  public  partner  is  one  whom  the  public  recognizes 
as  a  partner  in  the  concern  to  be  responsible  for  its 
conduct  and  liable  for  its  debts.  A  secret  partner  is 
one  whom  no  one  knows  anything  about.  He  conceals 
his  identity;  therefore,  he  does  not  become  liable,  for 
nobody  knows  who  he  is.  A  nominal  partner  is  one 
who  allows  others  to  use  his  name  for  the  sake  of  the 
standing  it  will  give  the  concern.  A  silent  partner  is 
a  man  interested  in  the  concern,  but  not  active  in  it. 
In  some  states  he  is  free  from  liability.  A  special 
partner  is  a  partner  interested  in  the  firm  only  to  a 
limited  amount. 

The  capital  of  the  partnership  is  usually  considered 
to  be  the  amounts  contributed  to  the  common  fund,  and 
the  right  of  either  partner  is  not  to  any  special  part  of 
the  capital,  but  to  share  in  the  proceeds  of  the  whole 
after  the  firm's  debts  are  paid.  Good-will  may  be  de- 
fined as  the  benefit  arising  from  the  reputation  of  a 
firm.  The  good-will  of  a  partnership,  individual  or 
corporation,  is  embodied  in  the  name  of  the  business. 
The  good-will  is  in  the  name,  and  for  that  reason  the 
name  of  a  partnership  or  corporation  is  carefully  safe- 
guarded by  the  law,  and  another  firm  of  individuals 
is  not  allowed  to  appropriate  the  name  of  an  existing 
business. 

138.  Obligations  of  partners. — The  first  and  most 
important  obligation  which  one  partner  owes  the  other 
partners  is  good  faith,  for  every  partner  is  to  a  large 
extent  at  the  mercy  of  every  other  partner.     Each  part- 


186  ECONOMICS 

ner  is  also  chargeable  with  loss  arising  through  his 
own  negligence,  but  not  for  any  losses  resulting  from 
an  honest  mistake  in  judgment.  Each  partner  is  also 
liable  for  all  the  debts  of  the  partnership. 

The  limitations  of  a  partner's  authority  are  as  fol- 
lows: He  has  authority  to  bind  the  firm  by  contract 
within  the  scope  of  the  partnership  business.  All  part- 
ners are  liable  for  fraud  committed  by  any  one  of  them. 
It  is  held  further  that  notice  to  one  partner  is  notice 
to  all  the  other  partners. 

In  proceedings  against  a  partnership,  it  is  not  looked 
upon  as  a  unit,  but  as  a  collection  of  individuals.  So, 
as  a  general  thing,  proceedings  against  partnerships 
are  carried  in  the  various  individuals'  names  and  not 
in  the  firm  name.  It  very  often  happens,  also,  that  in 
cases  of  dissolution  of  a  partnership,  a  conflict  arises 
between  the  partnership  creditors  and  the  individual 
creditors.  In  this  case  the  individual  creditor  has  to 
give  way.  If  something  remains  after  the  debts  of 
the  partnership  are  settled,  it  can  be  applied  to  the  debts 
of  the  individuals. 

139.  Duration  and  dissolution  of  partnerships. — The 
duration  of  a  partnership  is  usually  limited  by  the  ar- 
ticles of  copartnership,  but  it  may  be  dissolved  in  a 
number  of  different  ways.  First,  by  a  provision  in 
the  articles;  second,  by  mutual  consent;  third,  by  the 
act  of  one  or  more  of  the  partners ;  fourth,  by  a  change 
in  the  partnership;  fifth,  by  death  of  a  partner;  sixth, 
by  decree  of  a  court  of  equity ;  seventh,  by  bankruptcy. 

The  first  and  second  methods  of  dissolution  do  not 
require  any  discussion.  The  third  method  is  by  the 
act  of  one  or  more  of  the  partners.  For  example, 
when  one  partner  makes  an  assignment,  he  becomes 
unable  to  fulfill  his  duties  as  a  partner,  and  therefore 


FORMS  OF  OWNERSHIP  187 

the  partnership  is  dissolved  by  his  act.  Fourth,  by  a 
change  in  the  membership;  when  a  partner  withdraws 
or  transfers  his  interest  a  dissolution  may  be  effected. 
Fifth,  by  death;  the  interest  of  the  partner  dying 
descends  to  his  heirs,  and  as  the  surviving  partners  have 
the  right  to  choose  their  associates,  the  death  of  one  of 
the  original  partners  may  result  in  the  dissolution  of  the 
partnership.  Sixth,  by  decree  of  court;  in  case  of 
fraud  or  gross  mismanagement  the  partnership  may  be 
dissolved  by  decree  of  the  court.  And,  finally,  by 
bankruptcy. 

140.  The  corporation. — This  is  a  legally  constituted 
association  of  individuals  authorized  by  law  to  conduct 
business  through  their  elected  representatives,  who  are 
known  as  directors.  The  corporation  may  sue  and  be 
sued,  may  contract  debt,  and  may  conduct  its  business 
in  any  way  that  its  directors  please  within  the  limits 
prescribed  in  the  grant  of  authority  issued  by  the  state, 
which  is  known  as  the  charter.  These  charters  may  be 
perpetual,  but  are  usually  granted  for  a  limited  term 
of  years. 

The  directors  elect  the  officers  of  the  corporation,  who 
attend  to  its  management  and  who  report  to  the  di- 
rectors. The  directors  in  turn  report  to  the  stock- 
holders. If  the  directors  are  dissatisfied  with  the 
management,  they  may  change  the  officers  of  the  com- 
pany, and  if  the  stockholders  are  dissatisfied  with  the 
directors'  administration,  they  may,  at  any  annual 
meeting,  or  at  a  meeting  specially  called  for  the  pur- 
pose, choose  other  directors  in  their  places. 

141.  Advantages  of  the  corporation. — The  advan- 
tages of  the  corporation  are  great.  It  enjoys  per- 
petual existence;  that  is  to  say,  it  is  not  disturbed 
by  the  death  of  any  stockholder.     In  this  it  is  superior 


188  ECONOMICS 

to  the  partnership.  The  liability  of  the  stockholder 
is  limited,  as  a  rule,  to  the  money  he  has  invested  in 
the  corporation.  Every  partner,  on  the  other  hand,  is 
liable  to  the  amount  of  all  his  property,  wherever  it 
may  be  located,  for  the  debts  of  the  partnership.  The 
third  main  advantage  of  the  corporation  is  its  repre- 
sentative government.  The  stockholders  can  elect  their 
representatives,  the  directors,  in  the  same  manner  as 
the  voter  elects  the  members  of  the  legislature.  They 
can  also  call  their  representatives  to  account  at  any  time 
and  in  this  way  can  insure  that  the  business  is  conducted 
according  to  their  wishes. 

The  control  in  corporate  affairs  goes  by  a  majority 
of  the  shares  of  ownership,  which  are  known  as  shares 
of  stock.  Thus  a  corporation  may  have  a  capital  stock  of 
$500,000  and  if  its  shares  are  $100  par  value,  there 
will  be  5,000  shares  outstanding.  Each  one  of  these 
shares  represents  l/5000th  part  of  the  ownership  in 
the  corporation,  and  the  holder  of  each  share  is  entitled 
to  l/5000th  part  of  any  profits  which  the  directors 
may  decide  to  distribute  to  the  owners.  Thus  there  may 
be  2,000  men  owning  a  minority  of  stock  and  one  man 
owning  one  more  than  half  the  total  number  of  shares, 
and  this  man  can  name  the  directors  and  manage  the 
corporation  as  seems  to  him  good.  It  might  be  sup- 
posed that  under  such  a  system,  the  minority  stock- 
holders would  often  be  treated  with  great  injustice, 
and  this  has  sometimes  happened.  Generally  speak- 
ing, however,  no  such  trouble  is  experienced  and  the 
ownership  of  most  corporations  is,  moreover,  so  widely 
distributed  as  to  make  it  extremely  difficult  for  one 
man  to  obtain  control. 

142.  Limited  liability. — The  most  important  advan- 
tage of  the  corporation  arises  from  its  limited  liability 


FORMS  OF  OWNERSHIP  189 

feature.  A  man  can  be  interested  in  a  number  of 
industries  organized  under  the  corporate  form,  and  can 
still  give  his  undivided  attention  to  a  single  business 
without  either  endangering  the  solvency  of  that  bus- 
iness by  his  outside  interests,  or  making  any  particular 
demands  upon  his  time.  His  hability  in  each  case,  as 
we  have  seen,  is  limited  to  his  interest  in  the  property 
of  the  corporation.  As  a  result,  the  corporation  can 
draw  its  funds  from  widely  different  sources,  and  by 
uniting  the  contributions  of  thousands  of  individuals 
can  accomplish  results  which  would  be  impossible  for 
an  individual  or  a  partnership  to  achieve.  The  Penn- 
sylvania Railroad  Company,  for  example,  has  75,000 
stockholders  scattered  all  over  the  world.  Within  the 
last  dozen  years  this  corporation  raised  over  three  hun- 
dred millions  of  money,  a  large  part  of  it  by  selling 
shares  of  stock.  It  would  have  been  impossible  to  raise 
this  money  under  another  form  of  organization. 

Nearly  every  large  business  in  the  United  States  is 
now  conducted  by  corporations.  All  the  railroads, 
public  service  corporations,  steamship  lines  and  mining 
industries  are  so  conducted,  and  most  manufacturing 
enterprises  are  organized  under  the  same  form.  Part- 
nership prevails  among  smaller  manufacturers  and 
small  merchants,  but  even  in  these  fields  the  corporation 
is  coming  to  supersede  the  partnership.^ 

143.  Industrial  income — distribution  of. — Let  us 
now  follow  the  entrepreneur  in  the  conduct  of  his  bus- 
iness and  see  how  the  gross  earnings  of  the  business  are 
apportioned  or  distributed.  In  order  that  we  may  see 
exactly  what  this  process  of  distribution  is,  a  statement 
of  the  receipts  and  expenditures  of  the  Philadelphia 

1  For  further  details  with  regard  to  partnerships  and  corporations,  see 
the  volumes  on  Commercial  Law  and  Corporation  Finance. 


190 


ECONOMICS 


and  Reading  Coal  and  Iron  Company — a  corporation 
controlling  over  100,000  acres  of  coal  land  in  Eastern 
Pennsylvania,  and  operating  forty-seven  collieries — is 
inserted. 


THE  PHILADELPHIA  AND  READING  COAL  AND 
IRON  COMPANY. 


Income 

Amount 

Total 

Coal  sales . .        

$35,207,229.38 

248,717.75 

131,072.52 

116,283.83 

30,349.37 

Coal  rents 

House  and  land  rents 

Interest  and  dividends 

Miscellaneous 

Total  receipts 

18,382,202.00 

2,718,374.14 

458,522.89 

8,135,147.50 

589,728.97 

839,742.00 

32,862.10 

6,309.10 

3,449,649.21 

$35,733,652.85 

Expenditures 
Mining  and  coal  repairs 

Coal  purchased 

Royalty  of  leased  collieries 

Transportation  and  handling 

Taxes  on  coal  lands  and  improvements 

Improvements  at  collieries,  etc 

Improvements  and  repairs  of  houses 

Damages  account  coal  dirt 

All  other  expenses 

Total  expenditures 

$85,455.38 
864,083.91 

34,612,537.91 

Profit  from  operation 

$1,121,114.94 

Taxes  and  fixed  charges 

949,539.29 

Net  profit 

$171,575.65 

Profit  of  previous  years 

1,288,118.49 

Balance  to  credit  of  Profit  and  Loss  Account. . 

$1,459,694.14 

Here  is  the  process  of  distribution  set  out  in  detail. 
The  company  receives  $35,207,299.38  from  the  sale  of 
coal  and  $526,423.47  as  income  from  other  sources., 
This  income  is  now  distributed  in  the  following  manner : 
$18,382,202.00  to  wages,  current  repairs  and  supplies; 
$8,135,147.50  to  transportation  charges;  $458,522.89  to 


FORMS    OF    OWNERSHIP  191 

rents  (royalties)  ;  $1,539,268.26  to  interest  and  taxes; 
$872,604.10  to  repairs,  improvements  and  other  ex- 
penses necessary  to  make  good  deterioration  of  plant 
and  other  property;  and  $6,174,332.45  miscellaneous 
items  not  necessary  to  classify  for  the  present  purpose; 
leaving  a  net  profit  for  the  year  of  $171,575.65. 

We  have  here  illustrated  the  distribution  of  the  pro- 
ceeds of  industry.  The  coal  and  iron  company  leases 
the  coal  land  and  owns  the  collieries,  conducts  the  busi- 
ness, mines  and  sells  the  coal  and  receives  the  proceeds. 
The  sum  received  does  not,  however,  remain  in  the 
possession  of  the  company.  Indeed,  most  of  it  has 
been  paid  out  long  before  the  totals  on  the  year's  oper- 
ations have  been  made  up. 

144.  Claimants  to  income. — This  distribution  is  made, 
as  we  have  seen,  under  five  general  heads:  The  first 
expenditure  is  for  the  labor  necessary  in  the  operation 
of  the  mine.  The  company  employs  many  thousand 
workmen — superintendents,  assistant  superintendents, 
mine  bosses,  fire  bosses,  rockmen  employed  in  driving 
shafts,  miners  who  blast  out  the  coal,  inside  laborers  who 
break  up  and  load  the  coal,  outside  laborers,  employed 
outside  the  mines,  engineers  and  firemen,  drivers,  door 
boys  and  slate  pickers,  and  a  variety  of  other  labor. 

The  second  item  is  for  transportation  and  is  paid  to 
the  railroad  for  hauling  the  coal  to  market.  This  pay- 
ment is  made  on  the  basis  of  a  certain  rate  per  ton,  and 
the  rate  varies  according  to  the  value  of  the  coal.  The 
larger  sizes  of  coal  are  the  most  valuable,  and  therefore 
pay  the  highest  rate. 

The  payments  for  rentals  and  royalties  include  the 
amount  paid  for  the  hire  of  coal  land  and  other  property. 
The  fourth  item  is  interest  and  taxes.  These  are  includ- 
ed together  in  the  statement,  but  in  our  discussion  we 


192  ECONOMICS 

shall  separate  them.  Interest  is  paid  on  the  amount  of 
money  which  has  been  borrowed  at  different  times  in  the 
past  for  the  development  of  the  property,  and  taxes 
are  paid  to  the  local  and  state  governments.  The  fifth 
item — repairs  and  improvements — appears  in  the  ac- 
counts of  eveiy  business.  Unless  a  large  amount  is 
spent  in  maintaining  a  plant,  it  will  rapidly  deteriorate 
and  eventually  become  useless.  In  addition  to  the  ex- 
penses for  repairs,  as  we  have  seen  in  our  discussion  of 
capital,  there  must  also  be  an  amount  spent  in  renewals, 
because  the  time  comes  when  a  piece  of  machinery  can 
no  longer  be  repaired  and  must  be  replaced.  The  sixth 
item  of  the  list  is  surplus  or  profits.  This  is  what  re- 
mains to  the  owners  of  the  company  after  paying  all 
claims  against  it. 

Reserving  our  discussion  of  taxes  for  a  later  page, 
we  have  now  to  consider  the  four  main  shares  in  dis- 
tribution— ^wages,  rent,  interest  and  profits,  and  we  have 
to  discuss  the  influences  which  determine  the  shares  in 
distribution  which  go  to  each  of  these  factors. 


CHAPTER  II 

CLASSES  OF  WORKERS 

145.  The  organizer. — One  of  America's  distinctive 
contributions  to  the  industrial  world  is  the  organizer. 
To  be  sure,  Europe  has  her  organizers,  especially 
Germany  and  England  and  France,  but  in  the  number 
and  capacity  of  its  organizers  and  in  their  industrial 
achievements,  America  far  surpasses  any  other  country 
of  the  world. 

The  organizer  is  the  commander-in-chief  of  his  par- 
ticular industry.  It  is  not  his  duty  to  do  any  of  the 
detail  work,  either  with  his  hands  or  his  brain.  His 
occupation  consists  in  seeing  that  the  great  outlines  of 
the  industry  as  he  has  planned  them  are  placed  for 
execution  in  the  hands  of  competent  men.  The 
organizer  mobilizes  the  forces  of  labor  and  capital  and 
applies  them  to  the  natural  resources  in  a  way  which  will 
produce  the  largest  return  for  the  smallest  outlay.  It 
is  the  duty  of  the  organizer  to  superintend  only  the  big 
things  and  leave  the  detail  for  others.  One  of  the 
leading  men  in  American  industry  once  said  that  he 
never  did  anything  that  he  could  hire  some  one  else  to 
do;  in  other  words,  only  the  big  jobs  were  big  enough 
for  his  organizing  ability,  the  smaller  ones  could  be 
taken  care  of  by  his  subordinates. 

It  is  the  duty  of  the  organizer  to  see  that  he  has 

efficient  forces  to  execute  his  ideas.     This  is  one  of  the 

characteristics  of  a  successful  organizer;  it  is  likewise  a 

characteristic  of  any  other  leader  of  men.     He  must  be 
I-I3  193 


194  ECONOMICS 

a  sufficient  reader  of  character  to  select  subordinates 
who  will  see  things  as  he  does,  and  after  selecting  them 
he  must  have  sufficient  personality  to  impress  his  will 
upon  his  subordinates.  In  short,  the  organizer  must, 
first  of  all,  be  a  leader  of  men.  He  must  have  the 
ability  to  work  with  and  direct  others,  and  get  them  to 
do  the  things  as  he  wishes  them  done. 

146.  Knowledge  'possessed  by  the  organizer. — The 
successful  organizer  must  be  more  or  less  intimately 
acquainted  with  the  details  of  the  various  industrial  proc- 
esses which  fall  under  his  control,  and  he  must  be  on  the 
lookout  constantly  for  new  processes  which  will  give  him 
an  advantage  in  method  over  his  competitors.  One  of 
the  leading  manufacturers  of  electrical  machinery  is 
particularly  noted  for  his  ability  to  judge  of  the 
character  and  possible  outcome  of  an  invention  in  his 
line.  Not  only  does  he  constantly  invent  himself,  but 
he  is  careful  to  keep  in  touch  with  all  the  new  inventions 
pertaining  to  electricity  and  to  know  which  of  these  he 
needs. 

Another  thing  which  the  organizer  must  know 
intimately  is  the  condition  of  the  markets.  Before  he 
places  an  article  before  the  people  and  asks  them  to 
accept  it,  he  must  have  some  conception  of  what  the 
public  wants.  In  the  first  place,  he  must  know  what 
kinds  of  goods  are  in  demand;  and  in  the  second  place, 
he  must  know  where  this  demand  is  most  active — that 
is,  where  prices  are  highest.  In  addition  to  producing 
cheaply  the  article  which  he  is  manufacturing  by  an 
efficient  organization  of  his  labor  and  capital,  the 
organizer  must  be  acquainted  with  the  best  means  of 
shipping  and  disposing  of  his  manufactured  products. 

147.  Industrial  importance  of  the  organizer. — As 
already  stated,  the  organizer  is  peculiarly  American, 


CLASSES  OF  WORKERS  196 

and  to  the  presence  in  America  of  a  large  group  of 
efficient  organizers  we  owe  many  things,  the  most  im- 
portant of  which,  perhaps,  are  the  examples  of  large- 
scale  production  which  have  been  furnished  in  the  steel, 
oil  and  beef  industries,  and  the  use  of  by-products  in 
industry  which  is  an  essential  feature  of  large-scale  pro- 
duction. This  development  of  large-scale  production 
and  the  utilization  of  by-products  is  so  extensive  in  the 
large  industries  of  the  country,  and  has  so  cheapened 
the  cost  of  producing  commodities,  that  the  community 
is  enabled  to  get  many  articles  of  consumption  at  a  price 
which  represents  but  a  fraction  of  the  cost  of  the  same 
commodity  twenty  years  ago. 

The  organizer  is  important  in  any  community  of 
which  he  may  be  a  part.  The  community  revolves  about 
him  and  he  not  uncommonly  occupies  the  position  of  a 
feudal  baron  of  the  Middle  Ages.  Indeed,  in  many 
parts  of  the  country  to-day,  the  organizer,  or  the  com- 
pany of  which  the  organizer  is  the  head,  will  own  the 
factories,  the  mines,  the  houses  in  which  the  workers 
live,  the  stores  in  which  the  workers  buy  their  pro- 
visions; in  short,  all  of  the  economic  fortunes  of  the 
population  are  controlled  by  one  man  or  by  his  com- 
pany. This  unique  position  of  the  organizer  has  led  in 
the  past  to  many  abuses  which  the  laws  have  been  seeking 
for  some  time  to  correct.  Among  these  abuses  were  the 
company  store  and  the  payment  of  wages  in  scrip,  which 
could  be  exchanged  for  goods  only  at  the  company's 
stores.  In  this  way  the  money  which  was  paid  out  in 
wages  to  the  employes  was  at  once  taken  back  at  a 
profit  in  the  company's  stores.  Both  of  these  pro- 
ceedings are  now  generally  illegal. 

148.  How  the  supply  of  organizers  can  he  increased. 
— The  organizer  has  been  a  distinctive  factor  in  the  de- 


196  ECONOMICS 

velopment  of  our  present  industrial  progress,  and  as 
such  he  is  of  vital  importance  to  the  community.  Is  it 
possible  for  us  to  insure  a  continuance  of  the  supply  of 
organizers,  and  granting  the  existence  of  such  a  possi- 
bility, what  efforts  are  we  making  to  secure  this  continu- 
ance? It  is  probably  fair  to  say  that  we  have  made  no 
intelligent  effort  along  these  lines.  Our  public  school 
system  as  a  whole  is  calculated  to  develop  school- 
teachers and  clerks  rather  than  captains  of  industry  and 
only  in  the  last  few  years  have  the  colleges  made  any 
appreciable  effort  to  furnish  a  course  of  training  that 
will  put  a  man  in  a  position  to  assist  in  the  industrial 
world.  In  fact,  we  are  still  in  practically  the  same 
position  that  we  occupied  fifty  years  ago,  when  the 
organizer  rose  from  the  position  of  office  boy,  or  some 
similar  position,  gradually  learned  the  business  as  he 
went  along,  and  succeeded  in  becoming  an  organizer  of 
industry.  Organizers  "happen"  now  as  they  did  then. 
Granted  the  importance  of  the  organizer  in  industry, 
it  would  seem  that  our  institutions  should  be  so  shaped 
as  to  place  before  the  children  of  each  generation  an 
equal  opportunity  for  the  kind  of  an  education  that  will 
lead  to  the  development  of  organizing  ability  in  those 
who  possess  the  aptitude  or  desire  to  develop  it. 

149.  The  manager. — The  manager  occupies  a  posi- 
tion in  industry  analogous  to  that  occupied  by  the 
colonel  in  the  army.  It  is  the  duty  of  the  organizer  to 
map  out  plans  for  carrying  on  the  general  business 
policy  of  the  concern  with  which  he  is  connected.  The 
manager  is  the  person  who  executes  the  plans  made  by 
the  organizer.  It  is,  therefore,  necessary  that  the  man- 
ager be  in  close  touch  with  the  details  of  the  business. 
The  organizer  may  have  under  his  control  a  dozen 
cotton  mills  stretching  from  Massachusetts  to  Georgia. 


CLASSES  OF  WORKERS  197 

He  has  his  office  in  New  York  and  from  it  he  directs 
the  policy  of  the  whole  group  of  mills,  sometimes  visit- 
ing them,  but  generally  leaving  the  details  of  the  work 
at  each  mill  to  the  discretion  of  his  manager,  who  has  full 
charge  in  each  locahty  and  is  responsible  to  the 
organizer  only. 

To  be  sure,  there  are  many  business  operations  in  the 
United  States  in  which  the  same  man  acts  as  organizer 
and  manager;  but  the  tendency  in  modern  industry  is 
toward  a  centrally  located  office  having  control  over  a 
large  number  of  plants  scattered  through  the  country. 
At  the  central  office  is  an  organizer  having  charge  of 
the  general  policy  of  the  corporation.  At  each  of  the 
plants  is  a  manager  whose  work  centres  around  that 
one  plant.  The  manager,  like  the  organizer,  is  of  com- 
paratively recent  origin.  Fifty  years  ago,  in  most  in- 
dustries, the  head  of  the  industry  came  in  close  daily 
contact  with  the  wage-earners.  He  called  them  by 
their  first  names  and  worked  with  them ;  but  the  growth 
of  large-scale  production  and  the  concentration  of 
industry  in  a  comparatively  few  hands  have  made  it  im- 
possible for  the  organizer  or  business  head  to  know  any- 
thing of  the  details  of  his  operations  or  of  his  workers. 
He  deals  in  large  projects,  leaving  to  the  manager  the 
problems  that  arise  from  the  detail  workings  of  the 
plants  and  the  contact  with  the  wage  workers. 

The  manager  is  the  man  who  sees  that  the  productive 
machine  is  kept  running.  He  understands  the  ma- 
chineiy  in  his  particular  branch  of  industry  and  he 
understands  the  labor  market,  and  he  brings  the  wage 
worker  into  contact  with  the  machinery,  his  object  being 
to  secure  the  greatest  possible  production  from  the  com- 
bination of  the  wage  worker  and  machinery. 

The  position  of  the  manager  is  one  not  so  hard  to  fill 


198  ECONOMICS 

as  that  of  the  organizer.  He  is  not  required  to  initiate 
new  projects  nor  to  outline  large  operations,  but  rather 
to  work  out  and  develop  the  scope  of  the  particular 
branch  of  the  industry  to  which  he  has  been  assigned. 
It  is  not  necessary  that  he  should  have  had  so  broad  a 
business  training,  or  that  he  should  acquire  so  extensive 
a  knowledge  of  men  and  things  as  the  organizer.  What 
he  does  need  is  a  highly  developed  technical  knowledge 
of  his  line  of  business,  backed  by  a  general  knowledge 
of  trade  conditions  and  of  the  mechanism  of  produc- 
tion.^ 

150.  The  training  of  managers. — In  America  we 
have  developed  a  high  type  of  manager.  Beginning 
with  the  public  school  system,  as  it  has  grown  up  in  some 
of  the  newer  parts  of  the  country,  and  ending  with  the 
technical  courses  in  our  colleges,  an  opportunity  is  pre- 
sented for  the  development  of  those  traits  which  lead  to 
the  growth  of  a  group  of  successful  managers.  Until 
recently,  in  addition  to  those  opportunities  for  educa- 
tion, our  industries  have  presented  a  great  opportunity 
for  wage  workers  to  rise  from  the  ranks  and  become 
managers,  and  even  organizers  under  exceptional  con- 
ditions. 

The  recent  changes  in  modern  industry  are  unfavor- 
able to  the  development  of  additional  organizers,  but 
favorable  to  the  development  of  additional  managers. 
Not  only  must  the  organizer  of  to-day  have  the  ability 
to  group  various  branches  of  production,  to  select  his 
subordinates,  and  to  market  his  products  to  the  greatest 
advantage,  but  he  must  stand  out  against  large  cor- 
porations in  some  lines  and  monopolies  in  others,  and 
every  year  the  large  corporations  become  larger  and  the 

^The  work  of  the  organizer  and  manager  is  discussed  and  illustrated  in  the 
volume  on  Organization  and  Management. 


^ 


CLASSES  OF  WORKERS  199 

monopolies  more  absolute.  This  means  that  every  year 
great  organizers  are  forced  into  the  "trust."  That 
is,  they  go  out  of  business  as  independent  organizers 
and  accept  positions  as  managers  under  tlie  trust.  This 
trust  is  controlled  by  the  organizer  at  its  head,  who  is 
called  a  president;  a  number  of  vice-presidents,  who,  in 
many  cases,  perform  the  functions  of  organizers;  and 
a  group  of  business  managers,  each  one  of  whom  has 
charge  of  a  particular  operation  or  factory  or  mill. 

151.  The  boss. — Passing  now  to  a  discussion  of  the 
boss,  we  come  upon  one  of  the  most  interesting  features 
of  the  development  of  labor  organization  in  America. 
The  "bosses"  or  "foremen"  as  they  are  called  in  the 
factories,  stand  in  the  position  of  the  captains,  lieuten- 
ants and  corporals  of  a  military  organization,  and  in 
their  origin  they  are  typically  American. 

The  boss  occupies  the  same  position  in  our  modern 
system  that  the  overseer  did  in  the  slave  system.  It  is 
his  duty  to  see  that  none  of  the  men  loaf,  and  that  they 
do  their  work  efficiently.  The  manager  provides  the 
outlines  of  the  work  to  be  done,  and  the  boss  sees  that 
the  men  apply  themselves  to  the  work  and  fill  in  the 
outlines.  He  is  responsible  for  getting  the  largest 
amount  of  labor  possible  from  the  group  of  wage 
workers  under  his  charge.  The  immigrant  comes  over 
from  Europe,  ignorant  of  the  language,  of  the  kind  of 
work  done,  and  of  the  methods  used.  He  is  placed 
under  a  boss  who  tells  him  what  to  work  at  and  shows 
him  how  to  work.  Then  the  boss  must  see  that  the 
work  is  of  the  necessary  standard  of  quality  and  of  the 
required  amount. 

The  boss  does  not  use  the  whip  to  keep  his  laborers 
at  work,  but  he  does  employ  various  means  which  are 
even  more  effective.     He  puts  his  men  on  a  system  of 


«00  ECONOMICS 

"piece  work";  that  is,  they  are  paid  so  much  per  piece 
of  the  work  that  they  do,  instead  of  so  much  per  hour. 
For  example,  a  man  may  solder  the  bottom  to  the  frame 
of  a  lantern  at  three  cents  per  lantern  or  thirty  cents 
per  hour.  If  he  works  by  the  hour,  there  is  no  incentive 
to  work  hard,  but  if  by  the  piece,  he  will  do  his  best  to 
solder  at  least  ten  lanterns  an  hour,  and  perhaps  eleven 
or  twelve,  for  each  additional  one  means  more  in  his  pay 
envelope.  Then  it  is  tacitly  understood  that  a  man  must 
solder  ten  lanterns  an  hour  or  leave.  So  the  piece  work 
system  sets  a  rapid  standard  and  places  every  incentive 
before  the  wage  worker  to  exceed  that  standard.  We 
shall  discuss  piece  work  in  detail  on  a  later  page. 

The  pace  maker  is  another  means  of  increasing  the 
product  of  a  gang  of  workers.  The  boss  selects  a 
strong  man  and  pays  him  a  little  more  than  the  wages 
paid  the  other  men,  on  condition  that  this  man  shall  set 
a  rapid  pace.  He  carries  so  many  hods  per  hour,  or 
wheels  so  many  wheelbarrows  per  hour,  and  all  of  the 
other  workers  in  the  gang  are  required  to  keep  pace 
with  him  or  lose  their  positions.  This  system,  while  re- 
sulting in  a  larger  production,  bears  very  hard  on  the 
weaker  members  of  the  "gang."  In  addition  to  these 
two  methods,  the  boss  uses  talk,  sometimes  persuasive, 
sometimes  abusive,  but  always  directed  toward  the  one 
object  of  getting  a  large  product  per  man  employed. 

The  manager  and  the  organizer  require  an  extensive 
experience  and  great  executive  ability.  The  boss  re- 
quires only  the  ability  to  get  along  with  his  men  and 
persuade  them  or  compel  them  to  work  hard.  The  Irish 
made  the  first  bosses,  and  they  are  still  the  typical  ones, 
although  Italians  and  Slavs  are  now  taking  positions  as 
bosses  over  their  own  countrymen. 

152.  Classes  of  labor  in  relation  to  wages. — Turning 


CLASSES  OF  WORKERS  ^01 

now  to  the  questions  that  determine  the  rate  of  wages, 
we  have  first  to  note  the  distinction  between  classes  of 
labor.  In  the  Philadelphia  and  Reading  Coal  and  Iron 
Company,  we  may  distinguish  five  classes  of  employes: 

(1)  the  superintendents  and  assistant  superintendents; 

(2)  the  bosses  and  foremen;  (3)  the  miners  and 
engineers;  (4)  the  laborers  and  (5)  the  minor  em- 
ployes. These  divisions  of  employes  are  found  in  every 
business.  Under  the  bosses  or  foremen,  whose 
functions  in  industry  we  have  described,  come  the 
skilled  laborers.  The  skilled  workman  is  the  man  who 
understands  the  use  of  certain  tools,  machinery  or 
processes;  a  man  who  possesses,  in  other  words,  special 
knowledge  which  his  employer  can  utilize  to  make  a 
profit,  and  which  entitles  him  to  higher  pay  than  com- 
mon laborers.  Illustrations  of  skilled  workmen  are 
machinists,  coal  miners,  dyers,  engineers  and  firemen, 
carpenters,  brick  layers,  structural  iron  workers.  Be- 
fore qualifying  as  a  skilled  workman  in  any  of  these 
classes  an  extended  period  of  training  and  apprentice- 
ship is  required,  and  the  special  knowledge  which  a 
skilled  workman  possesses  represents  a  large  amount  of 
study  in  the  hard  school  of  experience.  Indeed,  the 
difference  between  the  skill  and  capacity  of  a  machinist 
who  may  receive  $3  a  day,  and  the  common  helper  in  a 
foundry  who  is  glad  to  work  for  $1.50  a  day,  is  far 
greater  than  indicated  by  the  difference  in  their  wages. 

153.  Unskilled  labor. — Below  the  skilled  laborers 
come  two  classes  of  unskilled  labor.  The  first,  con- 
sisting of  those  men  who  are  preparing  for  skilled  labor, 
is  represented  by  the  apprentices  in  every  line  and  also 
by  the  men  working  in  employments — like  fu-ing  a  loco- 
motive or  helping  the  coal  miner  in  his  work — which  are 
preparatory  to  skilled  work  commanding  a  high  wage. 


aoa  ECONOMICS 

To  prepare  to  fill  the  position  of  locomotive  engineer, 
for  example,  a  boy  is  first  put  at  helping  about  the 
roundhouse  doing  a  great  deal  of  hard  and  dirty  work, 
such  as  cleaning  out  fire  boxes,  etc.  He  is  then  made  a 
wiper,  and  is  entrusted  with  the  duty  of  cleaning  up  a 
locomotive  for  its  next  run  on  the  road.  After  a 
period  of  service  in  this  capacity,  he  is  put  to  firing  on 
a  freight  engine;  from  here,  if  he  shows  ability  and 
commends  himself  to  the  favorable  attention  of  his 
superiors,  he  is  promoted  to  passenger  fireman.  After 
a  more  extended  period  of  service  in  this  position,  he 
may  be  sent  out  as  a  freight  engineer.  Finally,  if  he 
is  sober,  industrious,  intelligent  and  careful,  he  may 
reach,  at  the  age  of  thirty-five  or  forty,  the  goal  of  his 
ambition,  the  position  as  engineer  in  the  through  pas- 
senger service.  In  every  skilled  employment  are  men 
who  are  working  just  below  it  preparing  themselves  to 
qualify  as  skilled  workmen.  These  men  are  usually  pos- 
sessed of  considerable  intelligence  and  must  have  a  fair 
common  school  education.  If  they  are  strong  and  will- 
ing, they  are  certain  to  be  advanced. 

The  lowest  class  of  labor,  known  as  unskilled  laborers, 
possess  little  save  their  physical  force.  The  members  of 
this  class  are  lacking  in  intelligence,  education,  foresight 
and  judgment.  They  can  be  trusted  to  execute  only 
the  most  simple  manual  tasks,  and  they  can  satisfactorily 
perform  these  only  under  the  close  supervision  of  fore- 
men. In  the  service  of  the  leading  railroad  of  the 
United  States  it  is  found  necessary  to  have  one  foreman 
for  every  five  common  laborers  employed.  In  other 
words,  it  pays  this  corporation  to  employ  one  man  at  $3 
a  day  to  supervise  and  stimulate  by  precept  and  example 
five  men  who  receive  $1.25  or  $1.50  a  day. 


CHAPTER  III 

CAUSES  AFFECTING  RATE  OF  WAGES 

154.  Real  and  money  wages. — Wages  represent  the 
amount  paid  for  the  service  of  physical  or  mental  labor. 
The  amount  of  wages  is  primarily  determined  by  the 
time  during  which  the  service  is  rendered,  as  a  day,  a 
week,  a  month  or  a  year.  Wages  are  paid  in  money 
and  the  greater  portion  of  these  wages  is  expended  upon 
commodities.  Real  wages,  therefore,  as  distinct  from 
money  wages,  are  measured  by  the  amount  of  com- 
modities that  money  wages  will  purchase.  They  vary 
inversely  with  prices.  The  higher  the  prices  of  the 
necessaries  of  life,  the  lower  the  real  wages  which  a  given 
amount  of  money  wages  will  procure.  This  distinction 
explains,  in  large  measure,  the  marked  differences  of 
wages  between  city  and  country,  and  between  the 
mining  camps  of  the  West  and  the  large  cities  of  the 
East.  Every  class  of  employes  demands  a  certain 
amount  of  the  comforts  and  necessaries  of  life,  an 
amount  which  varies  according  to  race,  education 
and  environment,  and  if  the  prices  of  those  necessities 
and  comforts  rise,  money  wages  must  rise  also. 

155.  Illustration  of  distinction  between  real  and 
money  wages. — The  labor  situation  on  the  Transvaal 
affords  an  excellent  illustration  of  the  influence  of  the 
prices  of  the  necessities  of  life  upon  the  real  wages  of 
labor.  Owing  to  the  necessity  of  importing  practically 
everything  which  is  consumed  in  the  district,  and  to  the 
cost  of  transportation,  the  cost  of  Uving  is  enormous. 

203 


^04s  ECONOMICS 

In  1903,  the  following  comparative  prices  of  leading 
food  materials  on  the  Rand  and  in  England  were  pub- 
lished: 

England.  Transvaal. 

Bread,  four  pound  loaf $  .12  $  .36 

Milk,   quart    06  .18 

Sugar,  seven  pounds 26  .52 

Eggs,  dozen   20  .92 

Potatoes,   fourteen   pounds 14  .84 

Meat,  one  pound 12  .24 

The  average  cost  of  decent  subsistence  for  a  family 
of  five  is  $122.40.  These  conditions  necessitate  high 
money  wages.  A  mine  manager  on  the  Rand  will  be 
paid  $680  per  month ;  a  battery  manager  $240 ;  machine 
drillers  $160,  and  carpenters  $125.  White  laborers  can- 
not earn  enough  wages  to  permit  them  to  live,  so  the 
mines  are  worked  by  native  labor,  Busuto,  Zulu  and 
Zambesi  blacks,  locally  known  as  "boys,"  who  receive 
from  twelve  to  fifteen  dollars  per  month  and  their  board. 
They  make  fairly  efficient  laborers,  but  the  cost  of 
obtaining  them  is  heavy,  and  the  supply  is  inadequate. 
They  are  constantly  deserting  to  return  to  their  homes, 
often  one  thousand  miles  distant,  and  enjoy  the  fruits 
of  their  labors,  according  to  the  native  philosophy  of 
life,  which  is  as  follows:  "Six  pieces  of  white  man's 
gold  will  buy  one  cow,  four  cows  will  buy  a  nice  little 
wife ;  half  a  dozen  wives  will  tend  my  mealie  patch  while 
I  smoke  and  look  on." 

156.  Distinction  between  fees  and  wages. — We  must 
here  note  the  distinction  between  the  fee  which  is  paid 
to  the  physician,  and  the  wages  or  salaries  which  are 
paid  to  the  workmen  or  superintendents.  The  fee  is 
a  fixed  price,  as  for  example,  $2  per  visit,  which  is  fixed 
by  custom  in  much  the  same  way  as  retail  prices  are 


CAUSES  AFFECTING  RATE  OF  WAGES         205 

fixed,  and  is  not  affected  by  the  time  during  which  the 
service  is  rendered,  nor  by  the  intensity  of  the  demand 
for  the  service.  A  man  whose  child  is  dying  would 
cheerfully  give  all  that  he  possessed  to  the  physician 
who  might  save  its  life,  but  the  charges  of  the  physician 
are  not  increased  on  this  account.  In  the  field  of  in- 
dustry, however,  the  prices  paid  for  services  rise  and  fall 
according  to  the  demand  for  those  services. 

157.  How  rates  of  wages  are  determined. — In  each 
of  the  classes  of  labor  a  certain  rate  of  wage  is  estab- 
lished which  is  fixed  by  the  custom  of  the  trade  and 
which  changes  very  slowly.  The  general  superin- 
tendent of  a  large  coal  mining  company,  for  example, 
may  be  paid  $15,000  per  year;  district  superintendents, 
$5,000;  the  foremen  and  bosses,  $1,000  to  $1,500;  the 
miners  and  engineers,  from  $60  to  $100  per  month;  com- 
mon laborers,  from  $35  to  $50;  and  minor  employes, 
boys  and  old  men,  from  $15  to  $30. 

The  lower  limit  of  this  rate  is  the  wages  either  of  the 
next  lowest  class  or  of  some  alternative  employment.  A 
locomotive  engineer,  for  example,  will  not  work  for  less 
wages  than  those  paid  to  locomotive  firemen.  The 
machinists'  wages  will  never  fall  to  the  level  of  a 
machinist's  helper.  The  lower  Hmit  of  wages  also  de- 
pends upon  those  of  some  alternative  employment,  such 
for  example,  as  farming.  Farm  wages  have  advanced 
rapidly  in  the  United  States  in  recent  years,  and  there 
are  few  farming  districts  where  a  strong  and  willing 
worker,  no  matter  how  unskilled  in  farming  operations 
he  may  be,  cannot  receive  $20  a  month  and  his  board. 
In  the  northeastern  section  of  the  country  it  is  fre- 
quently possible  for  a  man  and  his  wife  to  secure  em- 
ployment together  with  board  at  wages  from  $30  to  $40 
a  month  and  board  is  equivalent  to  a  wage  of  $1.50  d 


206  ECONOMICS 

day.  It  is  therefore  impossible  to  force  the  wages  of 
unskilled  labor  in  a  city  or  in  the  factory  districts, 
located  in  the  country,  below  this  figure.  The  upper 
limit  of  wages  is  the  value  of  the  laborer  to  the  em- 
ployer. The  standard  rates  of  remuneration  within 
each  class  are  fixed  by  the  demand  for  the  labor  of  that 
class  compared  with  the  supply  of  that  labor. 

158.  Demand  for  labor. — The  demand  for  the  labor 
of  each  class  depends  primarily  upon  the  utility,  in  the 
opinion  of  the  employer,  of  that  class  of  labor.  This 
utility  is  measured  by  efficiency,  and  efficiency  is 
measured  by  profit.  Modern  systems  of  cost  keeping 
have  been  worked  out  in  such  detail  that  it  is  possible  to 
determine  with  great  accuracy  that  portion  of  the  cost 
of  producing  a  commodity  which  is  to  be  assigned  to 
each  class  of  employes.  Careful  records  are  kept  of 
labor  costs  in  different  departments  or  on  different 
jobs.  On  the  basis  of  these  records,  judgments  are 
formed  as  to  the  profitableness  of  particular  mills  or 
departments.  The  superintendent  of  a  mill  who  receives 
a  high  salary  is  paid  that  salary  to  get  results,  and  these 
results  are  measured  by  the  earnings  of  the  mill.  He, 
in  turn,  by  his  system  of  cost  keeping,  is  able  to  deter- 
mine the  efficiency  of  the  different  departments  of  the 
mill,  which  are  in  charge  of  foremen.  If  in  a  particular 
department  costs  are  increasing,  the  superintendent  in- 
forms the  foreman  of  this  fact  and  insists  upon  an 
explanation.  The  cause  may  be  found  in  the  ineffi- 
ciency of  a  certain  class  of  employes,  who  may  either 
do  their  work  badly,  or  may  not  do  it  with  sufficient 
promptness  to  keep  the  department  ahead  of  them  sup- 
plied with  material  for  work.  Here  again  an  investi- 
gation is  made,  and  it  may  be  possible  for  the  foreman 
to  fix  the  responsibility  for  the  increasing  cost  of  his 


CAUSES  AFFECTING  RATE  OF  WAGES         207 

department  upon  some  one  employe  whose  efficiency  has 
fallen  below  the  standard.  This  employe  may  be  rep- 
rimanded, or  his  wages  may  be  cut,  or  he  may  be  dis- 
charged. In  the  same  way,  if  the  profits  of  the  mill 
increase,  the  manager's  salary  is  raised.  If  he  is  a  wise 
superintendent,  he  will  advance  the  wages  of  his  fore- 
men, and  they  in  turn,  unless  interfered  with  by 
restrictions  imposed  by  organized  labor,  will  push  up 
the  earnings  of  the  employes  to  whose  efforts  their 
success  has  been  due. 

159.  Other  causes  affecting  the  demand  for  labor, — 
The  demand  for  labor  depends  also,  very  directly,  upon 
the  demand  for  the  products  of  the  industry  in  which 
the  labor  is  employed.  When  prices  are  falling  and 
business  is  depressed,  the  demand  for  even  the  most 
skillful  and  efficient  superintendents  and  foremen  is 
greatly  reduced.  As  the  saying  is,  "there  is  no  work 
for  them."  At  such  a  time,  they  must  either  remain 
idle  or,  if  they  are  retained,  their  wages  are  likely  to 
be  seriously  reduced.  On  the  other  hand,  when  bus- 
iness is  active  and  prices  are  advancing,  employers,  in 
order  to  participate  in  these  profits,  rapidly  increase 
their  working  forces  and  all  classes  of  labor  share  in 
the  benefit. 

The  demand  for  labor  depends  finally  upon  the 
amount  of  competition  which  exists  between  the  em- 
ployers of  labor.  Every  mill  is  constantly  on  the  look- 
out for  good  hands.  There  is  a  never-ending  rivalry 
between  establishments  to  lure  away  efficient  help. 
This  competition  may  be  carried  on  by  advertising, 
as  when  the  common  labor  of  the  cities  of  the  Middle 
West  is  attracted  to  the  harvest  fields  by  published 
notice  of  high  wages  with  board  and  free  transportation, 
and  it  also  becomes  effective  through  the  influence  of 


208  ECONOMICS 

employes  who  are  constantly  recommending  to  the  at- 
tention of  a  foreman  some  friend  or  relative  employed 
in  another  mill. 

160.  The  supply  of  labor. — The  supply  of  labor  in 
each  class  consists  of  the  number  of  laborers  in  the 
class,  and  is  also  influenced  by  the  number  of  first-rate 
employes  in  the  class  below.  The  supply  of  unskilled 
labor  is  recruited  from  the  immigrants.  Nearly  all  the 
unskilled  labor  performed  in  the  Northern  States  to- 
day, aside  from  farm  labor,  is  done  by  Italians  and 
Slavs.  Without  the  aid  of  these  new  arrivals  it  would 
be  practically  impossible  to  carry  on  constructions  which 
are  necessary  to  the  development  of  our  resources. 
This  fact  is  clearly  recognized  by  all  large  employers 
of  labor,  and  their  influence  has  been  sufficient  to  de- 
feat any  of  the  plans  which  have  frequently  been 
brought  forward  to  be  enacted  into  law,  whose  eff'ect 
would  be  to  restrict  seriously  the  amount  of  immigra- 
tion. 

161.  Immigration. — ^During  the  twelve  years  ending 
1910,  the  number  of  immigrants  entering  the  United 
States  was  9,555,673.  Of  the  number  coming  in  1910 
17.1  per  cent  were  from  Great  Britain  and  Ireland, 
Germany,  Norway,  Sweden  and  Denmark;  24.8  per 
cent  from  Au stria- Hungary ;  20.7  per  cent  from  Italy; 
17.9  per  cent  from  the  Russian  Empire  and  about  19 
per  cent  from  all  other  countries.  Between  1870  and 
1910  20,541,754  immigrants  arrived  in  the  United 
States.  Since  the  working  population  of  the  coun- 
try at  the  present  time  does  not  exceed  40,000,000, 
the  importance  of  the  foreign  element  in  our  sup- 
ply of  labor  can  be  appreciated.  These  immigrants 
are,  with  few  exceptions,  desirable  additions  to  our 
population.     They  are  the  most  energetic  of  the  com- 


J 


CAUSES  AFFECTING  RATE  OF  WAGES         209 

munities  from  which  they  come.  It  is  a  serious  matter 
for  an  ignorant  foreigner  to  immigrate  several  thousand 
miles  to  a  country  with  whose  language  and  institutions 
he  is  entirely  unfamiliar.  Men  who  will  take  these  risks 
are  usually  men  whom  it  is  worth  while  for  the  United 
States  to  incorporate  into  the  body  of  our  citizens. 

Although  the  immigrant  usually  begins  his  work  as  an 
unskilled  laborer  he  rapidly  rises  into  the  ranks  of 
skilled  labor  and  often  displaces,  as  he  rises,  the  nation- 
ality already  in  possession  of  the  occupation,  most  of 
whose  members  move  on  into  more  profitable  occupa- 
tions. The  French  Canadians,  for  example,  displaced 
other  nationalities  in  the  cotton  mills  of  New  England, 
and  they  in  turn  are  being  hard  pressed  by  the  Slav 
and  the  Italian.  The  Russian  Jew  has  displaced  all 
other  nationalities  in  the  ready-made  clothing  industry, 
and  the  Italian  is  rapidly  gaining  a  monopoly  of  the 
barber's  trade.  Thus,  not  only  unskilled  labor  but 
skilled  labor  is  constantly  being  recruited  from  the 
ranks  of  the  immigrants.  The  farm  labor  of  the  Unit- 
ed States  will  in  the  future,  much  more  than  in  the 
past,  be  drawn  from  the  same  sources. 

162.  Conditions  of  employment  as  affecting  the  sup- 
ply of  labor. — The  supply  of  labor  is  also  influenced, 
in  like  manner  as  the  demand  for  labor,  by  the  general 
conditions  of  employment.  When  business  is  active  it 
is  difficult  to  get  sufficient  number  of  hands,  and  enter- 
prises are  frequently  crippled  by  lack  of  labor.  This 
was  evidenced  by  the  great  difficulty  experienced  by  the 
grain  and  cotton  farmers  in  1905-1906  in  securing 
enough  men  to  harvest  their  crops,  in  competition  with 
the  railroads,  which  were  offering  as  much  as  $1.75  per 
day  to  unskilled  laborers.     At  such  a  time,  moreover, 

in  all  trades  the  supply  of  labor  is  reduced  by  reason 
1-14 


210  ECONOMICS 

of  the  difficulty  of  enforcing  discipline.  When  a  man 
employed  on  time  wages  knows  that  there  are  a  dozen 
employers  waiting  for  him  if  he  loses  his  job,  he  is 
likely  to  be  indiiFerent  as  to  the  admonition  of  his  boss. 
Dm'ing  an  industrial  depression,  on  the  other  hand,  the 
supply  of  labor  is  abundant.  A  two-line  advertisement 
in  the  "Help  Wanted"  column  of  a  daily  paper  is  suf- 
ficient to  bring  a  crowd  around  the  door  of  a  mill  the 
following  morning.  In  1909  an  advertising  agent  in 
Philadelphia  inserted  a  request  for  an  office  assistant 
and  received  on  the  day  following  the  publication  of 
his  advertisement  178  inquiries. 

In  May,  1909,  only  one-half  of  the  bituminous  coal 
miners  of  Pennsylvania  were  employed.  In  the  iron 
and  steel  industry  there  was  about  80  per  cent  of  nor- 
mal employment,  and  on  the  railroads  90  per  cent. 
Smaller  establishments  made  even  a  worse  showing. 
The  Baldwin  Locomotive  Works,  for  example,  reported 
13,000  less  employes  than  in  1907,  and  in  the  railway 
equipment  industry  not  more  than  one-fifth  of  the  num- 
ber at  work  in  1907  were  employed  in  1909. 

The  efficiency  of  labor  is  also  far  greater  in  dull 
times  than  during  a  period  of  activity.  At  such  a  time 
the  inefficient  hands  are  laid  off,  only  good  men  are 
retained  and  these  are  spurred  to  the  utmost  diligence 
by  the  fear  of  losing  their  positions. 

163.  Supply  of  labor  in  each  class. — The  supply  of 
labor  in  each  class  is  influenced  by  various  considera- 
tions. It  depends  first  upon  the  natural  ability  and  the 
degree  of  preparation  necessary  to  qualify  for  the 
service  required.  In  the  railway  industry,  for  example, 
we  have  the  president,  the  traffic  manager,  the  railway 
engineer  and  the  section  hand,  each  an  employe  and 
each  representing  a  separate  degree  of  ability.     There 


CAUSES  AFFECTING  RATE  OF  WAGES         211 

may  be  two  hundred  men  in  the  United  States  who  are 
qualified  to  serve  as  raih-oad  presidents.  There  are  cer- 
tainly five  million  who  can  serve  as  section  hands.  The 
railway  president  may  receive  a  salary  of  $50,000  a 
year;  the  section  hand  $1.25  a  day.  The  work  of  the 
railroad  president  may  mean  profits  of  many  millions 
of  dollars  to  the  company  which  he  serves;  it  is  often 
a  question  whether  a  section  hand  contributes  more  than 
the  amount  which  he  receives. 

164.  Qualifications  for  various  positions. — Let  us  con- 
sider the  different  qualifications  for  these  four  positions, 
beginning  with  the  last.  All  that  is  required  for  a  good 
section  hand  is  a  reasonable  amount  of  energy,  ability 
to  stand  exposure  to  the  weather,  and  to  perform  simple 
manual  operations,  such  as  spiking  a  rail  to  a  tie,  or 
tamping  ballast,  or  cutting  weeds  along  the  right  of 
way,  or  wielding  a  pick  or  shovel  under  the  close  super- 
vision of  a  boss.  No  training  or  special  knowledge  is 
required  and  only  a  moderate  amount  of  physical 
strength. 

The  railway  engineer  receives  from  $110  to  $170  per 
month,  and  in  some  cases  higher  wages  extending  up 
to  $300.  To  serve  as  an  engineer,  a  man  must  have 
had  a  fair  common  school  education,  he  must  have 
served  a  term  as  apprentice  in  the  roundhouse,  and  as 
fireman  on  a  locomotive ;  he  must  have  good  vision ;  must 
be  a  man  of  correct  habits,  of  courage  and  of  unswerv- 
ing fidelity  to  duty.  He  must  understand  not  merely 
the  running  of  the  locomotive  in  such  a  way  as  to  con- 
form to  difficult  schedules  without  loss  of  time ;  he  must 
also  understand  the  mechanism  of  the  locomotive  so 
as  to  be  able  to  make  emergency  repairs  on  the  road. 
In  short,  the  engineer  must  combine  in  his  single  person, 
the  abilities  and  the  training  of  the  pilot  of  a  ship  and 


212  ECONOMICS 

a  first  class  machinist,  with  the  courage  of  a  fireman 
or  a  poHceman.  This  combination  of  quaUties  is  rare, 
and  it  is  not  surprising  to  find  that  the  supply  of  first 
class  engineers,  in  normal  times,  falls  short  of  the  de- 
mand. A  good  engineer  in  charge  of  a  fast  freight 
train  can  save  several  times  the  amount  of  his  salary 
over  the  work  of  a  poor  engineer  in  the  speed  with 
which  he  gets  his  train  over  the  division. 

165.  Railway  traffic  manager. — The  railway  traffic 
manager  is  a  man  of  a  still  higher  type  of  efficiency. 
He  must  be  intimately  acquainted  with  the  resources  and 
industries  of  a  large  territory.  His  knowledge  must 
extend  to  every  product  produced  or  consumed  within 
that  territory,  which  means  that  he  must  be  conversant 
with  the  leading  facts  of  every  industry.  Unless  he 
possesses  this  knowledge,  he  will  not  be  able  to  deter- 
mine with  accuracy  what  rates  are  required  to  show  the 
largest  earnings  for  his  corporation.  He  must  also 
be  familiar  with  the  movements  of  traffic  so  that  he 
can  be  certain  that  an  adequate  car  supply  will  be  on 
hand  when  it  is  wanted.  He  must  be  experienced  in 
dealing  with  men,  since  he  is  in  constant  contact  with 
a  large  number  of  shippers  who  are  demanding  favors 
or  proferring  complaints.  A  successful  freight  traffic 
manager  is  rare  and  commands  a  high  salary,  $15,000 
to  $20,000  a  year  being  not  uncommon.  Upon  the 
result  of  his  work  depends  the  success  or  failure  of  his 
company,  so  that  his  salary  may  represent  but  a  small 
fraction  of  the  value  of  the  services  which  he  renders. 

166.  The  railway  president. — A  railway  president  is 
the  highest  type  of  business  executive  in  the  United 
States.  He  is  of  various  types,  according  to  his  pre- 
liminary training.  Thus  the  late  president  Cassatt  of 
the  Pennsylvania  Railroad  Company  came  up  through 


CAUSES  AFFECTING  RATE  OF  WAGES         213 

the  engineering  department;  he  was  a  civil  engineer, 
and  he  also  thoroughly  understood  mechanical  engineer- 
ing as  applied  to  railroads.  President  Newman,  who 
resigned  from  the  New  York  Central  Railroad  Com- 
pany in  1909,  came  up  through  the  traffic  department; 
he  served  successively  the  Missouri  Pacific,  the  North- 
western, the  Great  Northern,  the  Lake  Shore  and 
Michigan  Southern  and  finally  the  New  York  Central, 
rising  from  one  rank  to  another  to  the  highest  position. 
Former  President  Mellen  of  the  New  Haven  and  Hart- 
ford is  known  best  as  an  operating  official,  having  come 
up  through  the  operating  department  of  various  rail- 
roads, first,  to  the  presidency  of  the  Northern  Pacific 
and  then  to  that  of  the  New  Haven  and  Hartford.  The 
late  President  Edward  H.  Harriman  of  the  Union 
Pacific  came  into  the  railway  service  from  the  financial 
side;  he  gained  great  renown  by  his  successful  adminis- 
tration of  the  finances  of  his  various  companies,  and  by 
the  facility  with  which  he  raised  exceedingly  large 
amounts  of  money. 

The  work  of  these  executives  is  of  incalculable  value 
to  the  companies  which  they  serve.  They  not  only  are 
familiar  with  every  detail  of  the  various  departments 
through  which  they  have  passed  but  they  must  also 
thoroughly  understand  the  work  of  all  other  depart- 
ments. They  are  called  upon  to  formulate  far-reach- 
ing plans  involving  an  expenditure  of  many  millions 
of  dollars  for  the  improvement  of  the  properties  placed 
in  their  charge.  They  have  often,  not  merely  to  formu- 
late these  plans,  but  to  provide  the  money  necessary 
to  carry  them  out,  and  supervise  the  expenditure  of  this 
money  after  it  has  been  received.  Upon  them  rests 
the  responsibility  for  the  administration  of  properties 
costing  hundreds  of  millions  of  dollars.     The  president 


gl4  ECONOMICS 

of  the  Pennsylvania  Railroad,  for  example,  has  direct 
responsibility  for  nearly  a  billion  dollars  of  property 
value.  Many  railroad  bankruptcies  are  directly  trace- 
able to  the  inefficiency  or  recklessness  of  their  presidents. 
On  the  other  hand  the  prosperity  of  such  companies  as 
the  Union  Pacific,  the  Great  Northern,  the  Atchison, 
and  the  Baltimore  and  Ohio  is  directly  due  to  the  en- 
ergy and  wisdom  with  which  their  aiFairs  have  been 
administered.  The  salary  paid  to  an  efficient  railway 
president  is  trifling  in  comparison  with  the  value  of  his 
services.  There  are,  as  we  have  stated,  perhaps  two 
hundred  men  who  can  perform  the  duties  of  such  a  po- 
sition, but  there  are  not  more  than  a  dozen  railway  pres- 
idents in  this  country  who  are  of  the  highest  type. 


CHAPTER  IV 

SYSTEMS  OF  PAYMENT 

167.  Payment  of  wages  according  to  efficiency. — We 
find  this  division  of  employes  according  to  efficiency 
running  through  every  branch  of  business.  The  sup- 
ply of  employes  in  every  industry  may  be  likened  to 
a  pyramid,  divided  into  a  number  of  cross  sections.  At 
the  top  there  are  very  few  men — the  base  is  composed 
of  the  bricks  and  mortar  of  common  humanity. 

There  is  a  growing  tendency  on  the  part  of  the  em- 
ployers to  base  the  compensation  of  their  employes 
directly  upon  their  efficiency.  To  this  end  various  sys- 
tems of  wage  payment  have  been  devised.  The  time- 
honored  method  of  paying  wages  is  so  much  per  day, 
per  week  or  per  hour.  These  wages  are  paid  to  all 
workers  in  the  same  class  and  have  little  reference  to 
the  efficiency  of  each  workman ;  they  are  standard  rates. 
Under  such  a  system  only  the  most  energetic  employe 
will  exert  himself  to  do  work  of  superior  quality  or 
to  turn  out  a  larger  amount  of  work  than  his  fellows. 
He  does  this,  moreover,  not  so  much  in  the  hope  of 
receiving  higher  wages  in  the  class  in  which  he  works, 
but  in  order  to  rise  into  the  class  above  him.  Further- 
more, such  men  are  rare,  and  the  tendency  of  time 
wages  is  to  reduce  every  workman  to  an  average  in 
both  quality  and  quantity.  If  he  does  more  than  the 
normal  amount  of  work  it  not  only  exposes  him  to  the 
jealousy  and  criticism  of  his  fellows,  but  imposes  an 
extra  amount  of  mental  and  physical  strain  upon  him 

215 


216  ECONOMICS 

for  which  he  receives  no  compensation.  It  has  long 
been  recognized  that  if  some  system  could  be  devised 
whereby  the  workman  would  be  paid  directly  according 
to  the  amount  he  produces,  the  results  would  be  most 
beneficial  to  the  employer.  It  is  the  object  of  every 
employer  to  make  as  much  money  as  possible.  These 
profits  are  made  by  producing  goods  and  selling  them 
at  a  profit.  The  more  goods  that  are  produced  in  a 
given  time,  if  a  ready  market  can  be  found  for  them, 
the  larger  will  be  the  profit,  and  the  amount  of  pro- 
duction depends  directly  upon  the  energy  with  which 
employes  drive  their  work. 

Furthermore,  in  the  expenses  of  production  are  large 
sums  which  must  be  paid  irrespective  of  the  output  of 
the  mill.  The  mill  has,  perhaps,  cost  $200,000.  Six  per 
cent  interest  on  this  amount  is  $12,000  per  year;  depre- 
ciation is  $20,000  per  year;  $1,000  will  be  paid  for 
insurance;  an  ofiice  organization  must  be  kept  up; 
salesmen  employed  and  retained  in  their  employment; 
engineers  and  firemen  and  watchmen  must  be  kept  the 
year  round;  taxes  must  be  paid.  In  the  aggregate, 
these  fixed  expenses  make  up  a  formidable  sum  which 
must  be  added  to  the  amount  paid  out  in  wages  and 
for  raw  materials.  These  fixed  expenses  are  divided 
by  the  total  number  of  pieces  of  cloth,  or  gross  of 
brushes  which  the  plant  turns  out,  to  ascertain  the  fixed 
expenses  per  unit  of  product.  The  larger  the  output 
of  the  plant  during  a  given  time,  the  lower  will  these 
fixed  expenses  be,  and  the  saving  will  be  so  much  sub- 
tracted from  the  cost  of  the  product.  This  fact  con- 
stitutes a  strong  argument  in  the  mind  of  the  manu- 
facturer in  favor  of  basing  the  compensation  paid  to 
employes  upon  their  efficiency,  in  order  to  induce  them 
to  turn  out  the  largest  possible  product. 


SYSTEMS  OF  PAYMENT  217 

168.  Loss  of  time  through  idleness. — These  consider- 
ations are  enforced  by  the  well-known  fact  that  the 
standard  of  efficiency  in  any  plant  where  men  are  paid 
so  much  per  day  or  per  week  is  low.  There  is  no  estab- 
hshment  employing  1,000  men  in  which  the  actual  loss 
of  time  every  day  through  idling  and  gossiping,  daw- 
dling about  work,  going  on  unnecessary  errands  and 
"killing"  time  in  a  great  variety  of  ways,  does  not 
exceed  in  the  aggregate  the  time  of  ten  men  for  ten 
hours  each  day.  A  loss  of  only  six  minutes  a  day  by 
1,000  men  equals  6,000  minutes  or  100  hours,  the 
amount  of  time  mentioned.  Thorough  supervision  in 
order  to  prevent  this  evil  of  "soldiering"  is  impossible. 
The  worker  of  to-day,  unlike  the  slave  whose  aim  was 
to  accomplish  as  little  as  possible,  turns  out  the  largest 
product  when  his  interest  is  so  involved  that  he  does 
not  receive  supervision.  The  best  way  to  influence  him 
to  accomplish  the  best  results  for  his  employer  is  to  con- 
vince him  that  by  working  in  his  employer's  interest 
he  is  working  in  his  own  interest.  Says  Mr.  Outer- 
bridge  : 

Few  operatives  succeed  in  obtaining  regularly  day  by  day  the 
maximum  output  from  any  machine ;  some  have  not  the  requisite 
skill,  others  fail  through  lack  of  attention  to  small  details, 
such  as  forethought  and  method  in  grouping  or  assembling  the 
work,  others  through  laziness  or  disinclination  to  turn  out  more 
than  a  certain  amount  of  finished  material  in  a  day.  An  oper- 
ative may  also,  through  lack  of  constant  attention  to  the  work, 
unconsciously  limit  the  output  of  a  costly  machine  and  thus 
cause  loss  to  his  employer  far  exceeding  the  entire  amount  of  his 
wages.* 

This  loss  is  a  certain  one.     Suppose  that  the  average 

1 "  The  Premium  System  of  Wage  Payments,"  Alex,  E.  Outerbridge,  Jr., 
Annala  of  the  American  Academy  of  Political  and  Social  Science,  1903. 


218  ECONOMICS 

wage  in  the  establishment  mentioned  is  $2  per  day. 
The  full  time  of  ten  persons,  $20  per  day  or  $6,000 
per  year,  represents  a  good  return  on  $100,000  of  cap- 
ital. If  this  loss  could  be  saved,  the  owner  of  the  mill 
would  add  $100,000  to  its  value. 

169.  Systems  of  wage  payment  calculated  to  increase 
efficiency. — Three  plans  have  been  advocated  to  iden- 
tify the  interests  of  the  employes  with  those  of  the 
employer,  and  to  encourage  him  to  turn  out  the  largest 
possible  amount  of  work.  These  methods  are  as  fol- 
lows: Profit-sharing,  piece  work  and  the  premium 
system.  By  the  system  of  profit-sharing  a  certain  per- 
centage of  the  profits  is  divided  among  the  employes 
at  periodical  intervals.  In  some  cases  they  are  allowed 
to  subscribe  to  the  stock  of  the  company  on  favorable 
terms.  Other  plans  give  them  an  interest  in  all  profits 
over  a  certain  amount;  still  others  divide  a  fixed  per- 
centage on  the  entire  profits  of  the  year. 

Profit-sharing  has  not  proved  successful;  various 
practical  objections  having  been  discovered  to  it  as 
a  result  of  many  experiments.  In  the  first  place, 
profit-sharing  fails  to  produce  the  desired  results  in 
the  increased  efficiency  of  the  individual  employe. 
When  the  profits  of  the  concern  are  the  joint  result 
of  several  thousand  workmen,  it  is  impossible  for  any 
one  man  to  trace  the  connection  between  the  bonus 
which  he  will  receive  at  the  end  of  the  year,  and  the 
increased  energy  and  attention  which  he  may  have  put 
into  his  work.  Few  workmen  are  able  to  look  ahead 
twelve  months  or  even  six  months  to  the  results  which 
will  come  to  them  because  of  increased  effort  to-day. 
Employes  are  also  apt  to  be  dissatisfied  with  the  results 
as  stated.  They  believe  that  the  firm  is  making  large 
profits,  even  when  profits  have  been  reduced  from  causes 


SYSTEMS  OF  PAYMENT  219 

altogether  beyond  their  comprehension.  They  are  apt, 
therefore,  to  become  dissatisfied,  and  then  the  good  re- 
sults of  the  profit-sharing  plan  fall  to  the  ground. 

170.  Profit-sharing  unfair  to  employer. — Moreover, 
the  profit-sharing  plan  is  not  entirely  fair  to  the  em- 
ployer. There  are  many  conditions  which  aifect  profit 
and  loss  in  the  manufacture  of  raw  material  into  finished 
products  with  which  the  operative  has  no  connection — 
careful  buying  of  material,  favorable  traffic  contracts, 
payment  of  large  sums  for  inventions  that  reduce  costs 
and  of  unusually  high  prices  for  patented  machinery. 
Such  causes  may  add  largely  to  the  profits  of  the  con- 
cern. Unless  the  employe  is  willing  to  share  in  losses 
due  to  mistakes  and  blunders  of  the  management  or 
to  the  general  industrial  situation  of  the  country,  it 
is  manifestly  unfair  that  he  should  ask  to  participate 
in  profits  in  whose  making  he  has  had  no  share. 
Furthermore,  aside  from  these  considerations,  it  is  im- 
possible to  open  the  books  of  a  concern  to  the  inspec- 
tion of  the  employes,  nor  would  they  understand  the 
method  of  accounting  even  if  the  books  were  opened. 
For  these  reasons,  profit-sharing,  although  it  is  in  opera- 
tion in  a  number  of  concerns,  is  not  regarded  by 
practical  business  men  as  a  plan  which  can  be  recom- 
mended for  general  adoption. 

Progressive  wages  have  served  to  increase  the  laborer's  effi- 
ciency, but  they  have  not  avoided  entirely  disputes  between 
employers  and  employees.  Profit  sharing  is  a  plan  for  giving 
the  laborer  an  inducement  to  work  efficiently,  and  for  securing 
greater  hannony  of  interests  between  employers  and  workmen. 
Under  its  provisions:  hired  laborers  are  given  shares  in  the 
profits  of  the  business,  the  share  of  each  workman  being  de- 
termined beforehand  upon  some  equitable  basis.  The  purpose 
of  such  an  arrangement  is  to  induce  laborers  to  increase  their 


«eO  ECONOMICS 

output,  improve  its  quality,  and  thus  contribute  toward  the 
creation  of  extra  profits  in  which  they  may  share.  In  some 
instances  experiments  in  profit  sharing  have  had  this  result,  and 
have  proved  at  least  moderately  successful.  But  in  many  cases 
they  have  proved  unsuccessful,  and  have  been  given  up.  A 
common  reason  for  such  failure  is  that  there  have  been  very 
small  profits  to  divide,  or  even  no  profits  at  all ;  so  that  laborers 
have  had  little  interest  in  the  scheme,  and  have  not  hesitated  to 
strike  if  there  was  any  prospect  of  immediate  advantage  re- 
sulting from  such  a  course. 

Experience  has  shown  that  profit  sharing  does  not  do  away 
with  strikes,  although  in  some  cases  it  has  promoted  a  better 
understanding  and  feeling  between  employer  and  employed. 
Concerning  its  merits  as  a  plan  for  distribution,  the  following 
points  may  be  noticed.  If  the  share  of  profits  received  by 
laborers  is  created  by  increased  efiiciency  and  exertion  on  their 
part,  then  it  may  be  as  favorable  to  efficient  production  as 
systems  of  progressive  wages,  but  hardly  more  so.  Unfortun- 
ately, however,  the  profits  actually  realized  by  a  business  depend 
so  much  upon  good  management  by  the  employer  that  their 
amount  may  not  vary  proportionately  with  the  increased  zeal  and 
efficiency  of  the  workers.  Laborers  may  increase  their  product 
10  per  cent,  but  bad  business  management  may  result  in  an 
actual  loss  on  the  sales.  In  such  a  case  profit  sharing  may  be 
unjust  to  the  employe.  On  the  other  hand,  if  the  profits  re- 
ceived by  the  laborers  are  merely  a  gratuity  from  the  employer, 
then  the  system  is  unfair  to  him.  For  laborers  would  be  made 
to  share  in  any  profits  earned  by  the  business,  while  they  would 
bear  no  share  of  the  losses.  In  conclusion  it  may  be  said  that 
profit  sharing  has  accomplished  less  than  its  more  ardent  sup- 
porters have  expected.^ 

171.  Piece  wages. — By  the  system  of  piece  work,  the 
employe  is  paid  according  to  the  amount  which  he  does. 
In  a  cigar  factory  with  which  the  writer  is  famiHar, 
the  rate  for  rolling  high  grade  cigars  is  $20  a  thousand. 

1 C.  J.  Bullock,  "  Introduction  to  the  Study  of  Economics,"  pp.  486-7. 


SYSTEMS  OF  PAYMENT  221 

A  first  class  operative  in  this  mill  can  roll  180  cigars 
a  day,  which  will  give  him  earnings  of  over  $3.  A  be- 
ginner or  an  inefficient  hand  will  not  roll  more  than 
fifty  or  even  a  smaller  number.  This  system  of  piece 
work  is  very  largely  employed  wherever  the  connection 
of  the  employe  with  the  product  is  personal  and  direct 
and  where  the  attitude  of  laborers  does  not  make  this 
undertaking  impossible. 

172.  Objections  to  piece  work. — The  objections  to 
this  system,  however,  are  serious.  Piece  work,  from  its 
very  nature,  puts  a  premium  on  quantity  rather  than 
quality.  Very  careful  supervision  and  inspection  of 
the  product  is,  therefore,  required  if  the  quality  is  not 
to  deteriorate.  Again,  the  workmen  are  generally  hos- 
tile to  the  system  on  account  of  the  practice,  which  is 
common  among  employers,  of  cutting  piece  rates  so 
as  to  compel  the  workman  to  labor  much  harder  to  gain 
a  certain  wage  than  he  did  under  the  time  system. 
This  objection  is  almost  inherent  in  the  system.  When 
piece  wages  are  established  the  usual  method  is  to  ascer- 
tain how  much  an  employe  of  average  capacity  can  turn 
out  in  a  day,  and  to  divide  this  quantity  of  work  into 
the  standard  wage,  giving  a  rate  per  piece.  As  soon 
as  the  system  is  introduced,  earnings  immediately  in- 
crease because  an  increased  amount  of  work  is  turned  out. 
Although  this  was  the  object  of  introducing  this  system, 
yet  the  thought  immediately  comes  to  the  employer  that 
his  men  have  been  doing  less  than  fair  work  under  the  old 
system  of  time  wages.  He  therefore  frequently  yields 
to  the  temptation  to  reduce  their  rates,  since  he  is  unable 
to  see  that  they  are  doing  more  work  than  they  should 
for  the  wages  which  he  is  paying  them. 

Furthermore,  employers  frequently  spend  large  sums 
of  money  in  re-equiping  their  plants  with  expensive 


«««  ECONOMICS 

machinery  which  greatly  increases  the  output  of  the 
mill.  They  pay  for  these  improvements  and  they  do 
not  feel  that  the  workmen  whose  piece  wages  are  enor- 
mously increased  as  a  result  of  the  improvements,  should 
gain  all  the  advantage.  The  strike  in  the  works  of  the 
Carnegie  Steel  Company  in  1892  was  precipitated  by 
an  attempt  to  reduce  piece  wages  which  had  risen  for 
some  classes  of  labor  to  such  an  enormous  figure  that 
certain  employes  were  making  more  money  than  the 
average  superintendents,  a  fact  due  entirely  to  the  intro- 
duction of  improved  machinery  by  the  company.  The 
cutting  of  piece  rates  constitutes  a  formidable  objection 
to  the  system  of  piece  wages  and  is  responsible  for  the 
universal  antagonism  of  labor  organizations  to  this  sys- 
tem of  wage  payment. 

173.  The  premium  system  of  wage  payment. — The 
best  method  of  solving  the  problem  of  increasing  the  la- 
borer's efficiency  is  by  what  is  known  as  the  premium  sys- 
tem, by  which  the  results  of  the  increased  efficiency  of 
the  piece  rate  system  are  divided  between  the  employer 
and  employe.  Under  the  premium  system,  the  saving 
which  results  from  the  joint  effort  of  the  employer  in 
the  constant  improvement  in  machinery  and  processes 
and  in  his  attention  to  various  details  of  works  man- 
agement, and  the  increased  diligence  of  the  employe, 
who  is  paid  according  to  the  amount  he  produces,  is 
divided  between  them.  In  introducing  the  premium 
system,  the  first  step  is  to  establish  in  each  branch  of  the 
business  an  average  standard  performance;  to  ascertain 
by  careful  observation  the  amount  of  work  which  a  man 
of  average  capacity,  working  with  reasonable  diligence, 
can  perform  in  an  hour  or  a  day.  This  is  made  the 
standard  to  which  every  employe  is  required  to  conform 
in  return  for  his  regular  wages,  which  are  fixed  at  a 


SYSTEMS  OF  PAYMENT  223 

certain  figure  for  all  employes  of  that  class.  At  the 
same  time,  he  is  informed  that  any  saving  in  the  labor 
cost  of  producing  the  product  on  which  he  is  engaged, 
will  be  divided  on  a  certain  agreed  basis  between  him- 
self and  the  firm. 

The  employer,  in  other  words,  makes  this  proposi- 
tion to  his  workmen:  "I  will  pay  you  a  minimum  day 
wage  and  for  that  wage  you  must  produce  certain  min- 
imum number  of  pieces  in  order  to  deserve  that  wage; 
for  each  additional  piece  you  add  to  that  minimum  you 
will  receive  so  much."  For  ten  pieces,  under  the  pre- 
mium system,  a  man  would  be  paid  $10,  or  $1  for 
each  piece.  If  he  turns  out  fifteen  pieces,  instead  of 
receiving  $15,  as  under  the  system  of  piece  wages, 
he  may  receive  $12.50  or  $13  as  result  of  his  diligence 
in  doing  more  than  his  allotted  task.  He  thus  receives 
a  reward  and  his  employer  has  also  shared  in  the  profit 
to  which  the  employer  may  contribute  by  the  invest- 
ment of  his  money  in  facilitating  the  various  operations 
of  his  plant. 

The  following  illustration  furnished  by  one  of  the 
managers  of  a  large  foundry  and  machine  shop,  shows 
the  effect  of  the  piece  work  system: 

COST  OF  PRODUCTION  PER  LATHE  PER  DAY. 

Ordinary  Piece-Work  System.  DiferenUil  R%te  System. 

Man's  wages    $2.50      Man's  wages      ,    .     $3.50 

Machine  cost   3.37      Machine  cost  .   k    .    3.37 

Total  cost  per  day $5.87         Total  cost  per  day $6.87 

Five  pieces  produced;  cost  per              Ten  pieces  produced;  cost  per 
piece   1.17         piece   69 


174.  Summary  of  the  advantages  of  the  premium  sys- 
tem.— Mr.  Outerbridge,  in  the  article  already  referred 


224  ECONOMICS 

to,  illustrates  and  summarizes  the  advantages  of  the 
premium  system  as  follows: 

Reference  may  be  made  to  a  case  where  new  work  was  intro- 
duced into  an  establishment  undertaking  an  entirely  new  kind  of 
manufacture.  The  concern  had  never  done  the  work  before, 
so  did  not  know  at  all  what  it  was  going  to  cost.  Parts  of 
the  machines  were  given  out  to  the  different  departments  to  be 
made  by  day's  work,  because  nobody  knew  what  the  cost  was 
liable  to  be.  The  people  selected  to  work  by  the  day  were  the 
men  who  were  considered  the  quickest  and  best  workmen  in  the 
establishment,  who  would  be  likely  to  make  those  parts  under 
the  system  of  day's  work  as  cheaply  as  they  could  be  made, 
so  that  the  actual  cost  of  making  them  in  this  way  might  be 
made  the  basis  for  a  piece-work  price.  Quite  a  large  number  of 
the  parts  were  made  by  day's  work.  I  saw  some  of  the  work 
being  done  myself,  and  did  not  observe  anything  that  led  me  to 
believe  that  there  was  any  loafing  on  the  part  of  the  men.  A 
piece  price  was  finally  fixed  based  upon  the  average  cost  by 
day's  work.  After  the  men  got  more  skilled  in  their  jobs  they 
did  a  little  better,  but  the  average  was  taken  for  the  piece-work 
price.  It  so  happened  that  some  precisely  similar  things  were 
made  in  another  establishment,  and  through  an  accident  it  was 
ascertained  that  an  article  which  cost  about  twenty-four  dollars 
to  make  under  this  system  of  piece  work  cost  about  thirteen  dol- 
lars to  make  in  the  other  establishment  where  a  premium  system 
was  in  vogue.  An  investigation  showed  that  the  actual  amount 
of  labor  required  to  make  the  pieces  was  the  same  in  each  foun- 
dry, but  in  one  the  simple  piece-work  system  of  pay  obtained ;  in 
the  other  a  premium  system.  Then  an  entire  change  of  personnel 
in  the  department,  including  the  foreman,  was  made;  new  men 
were  engaged  to  do  the  work  on  a  premium  system  and  the  result 
was  surprising.  In  a  very  short  time  the  new  men  were  making 
nearly  double  the  wages  of  the  former  operatives  and  the  cost 
per  piece  was  reduced  nearly  one-half. 

175.  Advantages  to  employes  from  introduction  of 


SYSTEMS  OF  PAYMENT  225 

improved  machinery. — In  the  same  article  Mr.  Outer- 
bridge  says: 

This  system,  of  course,  does  not  spare  the  tools,  which  are 
run  at  a  high  rate,  and,  since  its  introduction,  the  views  of 
progressive  manufacturers  regarding  the  economical  use  of  ma- 
chine tools  have  materially  changed.  Formerly  old  tools  were 
venerated  and  carefully  preserved  as  long  as  they  could  be  used. 
Now  the  aim  is  to  obtain  the  full  life-service  in  the  shortest 
possible  time,  and  then  to  consign  the  tool  to  the  scrap  heap. 
In  this  way  tools  are  worn  out  long  before  they  have  become 
obsolete  in  design.  "Soldiering"  on  the  part  of  the  operatives  is 
effectually  eliminated,  wages  are  raised,  the  output  increased 
and  cost  of  production  is  decreased  in  an  amazing  ratio.  All 
this  is  accomplished  without  exhausting  toil  on  the  part  of  the 
operative,  for  the  machine  has  relieved  him  of  most  of  the  hard 
work.  Especially  is  this  noticeable  in  handling  heavy  materials. 
In  former  days  rupture  was  very  common  indeed  among  molders 
in  foundries,  caused  by  frequent  severe  straining  in  lifting  flasks 
and  molds;  now  it  is  a  rare  thing  to  find  rupture  among  the 
younger  molders,  owing  to  the  fact  that  in  all  modern  foundries 
traveling  cranes  and  other  hoisting  appliances  are  provided  for 
lifting  heavy  materials  and  carrying  them  from  one  place  to 
another. 

Within  my  own  experience  there  has  been  a  great  improvement 
in  this  respect.  I  can  recollect  at  least  six  molders  in  one 
foundry  who  were  badly  ruptured  from  lifting  their  molds, 
while  to-day  I  never  hear  of  this  trouble,  for  the  main  cause  has 
been  removed.  The  mechanic  of  to-day,  who  is  engaged  in  rivet- 
ing a  boiler  or  a  bridge  structure,  no  longer  spends  ten  hours 
a  day  in  striking  blows  with  monotonous  regularity  upon  the 
rivet  heads,  but  he  is  employed  to  control  the  steam  or  hydraulic 
riveting  machine,  a  sort  of  giant  hand,  which  presses  the  red-hot 
rivet  into  place  with  a  simple  silent  squeeze  of  its  powerful  finger 
far  more  effectually  than  can  be  done  by  two  strong  men  striking 
one  hundred  blows  each  with  a  riveter's  hammer.     This  has  been 

proved  by  official  tests. 
J— 15 


226  ECONOMICS 

176.  Hazards  of  different  occupations. — The  supply 
of  labor  is  influenced  by  the  dangers  and  risks  incident 
to  the  occupation.  This  influence  operates  in  two  ways. 
In  the  first  place  the  supply  of  men  whose  character 
and  training  qualifies  them  to  engage  in  a  hazardous 
occupation  is  limited  in  such  callings  as  that  of  the  loco- 
motive engineer,  the  structural  iron  worker,  and  the  city 
fireman,  which  require  a  degree  of  courage  and  steadiness 
of  nerve  possessed  by  very  few  men.  Then  there  are  a 
number  of  occupations  so  unhealthful  and  even  deadly 
that  special  inducements  must  be  off'ered  to  secure  an 
adequate  supply  of  labor.  The  worker  in  these  occu- 
pations requires  no  unusual  moral  or  physical  quality, 
but  when  he  enters  them  he  risks  his  life,  either  because 
of  the  unusual  risk  of  serious  accident,  against  which 
he  cannot  guard  himself,  or  because  of  the  naturally 
unhealthful  conditions  surrounding  the  occupation. 

Coal  mining  though  less  hazardous  than  formerly, 
is,  at  best,  a  dangerous  occupation.  Water  drips  upon 
the  mine  worker  from  the  roof  and  oozes  around  his 
feet.  There  is  constant  danger  in  electrically  equipped 
mines  from  live  wires  which  run  only  a  few  inches  above 
the  heads  of  the  miners.  Even  with  perfect  ventilation, 
which  is  rarely  found,  the  air  is  frequently  foul  with 
powder  fumes,  and  the  pitch  darkness  is  barely  pierced 
by  the  feeble  gleams  of  the  mine  lamps.  The  mine 
worker's  toil  is,  moreover,  enlivened  by  the  constant 
danger  of  falls  of  slate,  against  which  at  times  no  cau- 
tion can  protect,  while  the  danger  of  explosion,  es- 
pecially in  bituminous  coal  mines,  is  always  present. 
Much  of  the  work  is  itself  excessively  severe;  that  of 
loading  cars  with  coal  and  handling  heavy  pieces  of 
slate  being  especially  arduous.  Coal  mining  is  at  best 
an  unhealthy,  exhausting,  excessively  disagreeable  and 


SYSTEMS  OF  PAYMENT  227 

distinctly  dangerous  occupation.  The  mine  worker 
often  carries  his  life  in  his  hands.  Measured  by  the 
perils  and  hardships  of  his  calling,  he  is  entitled  to  the 
highest  wages  and  the  most  liberal  treatment,  neither  of 
which,  until  recent  years,  has  been  accorded  him. 

Largely  as  a  result  of  the  hardships  and  dangers  of 
the  coal  mining  industry  and  also  because  of  the  fact 
that  the  mine  worker,  when  thoroughly  organized,  is  not 
amenable  to  discipline,  the  supply  of  labor,  even  at 
mines  which  pay  high  wages,  is  very  irregular.  Steady 
work  in  the  mine  is  too  severe  for  a  man  of  average 
physique  and  it  is  difficult  during  periods  of  active  de- 
mand for  the  companies  to  secure  sufficient  labor  to 
supply  their  customers. 

177.  Illustration  from  manufacture  of  bleaching 
powder, — Another  illustration  of  dangerous  occupa- 
tions is  given  in  Wood's  "Primer  of  Political  Econ- 
omy," in  a  description  of  the  method  of  making  bleach- 
ing powder: 

In  another  part  of  the  works  are  men  laboring  before  great 
furnaces.  Each  has  a  large  bunch  of  oakum  in  his  mouth  to 
keep  him  from  inhaling  the  poisonous  gas  escaping  from  the 
salt  cakes,  which  he  is  turning  and  drawing  from  the  glarings 
heated  aperture.  With  two  towels  he  manages  to  wipe  the  per- 
spiration from  his  face,  one  towel  being  in  use  while  the  other 
is  dr^'ing,  and  there  he  works  in  the  heat  for  eight  hours  with 
scarcely  a  minute  to  snatch  a  bite  of  food.  The  work  of  the 
salt-cake  men  consists  of  baking  common  salt  and  treating  it 
with  vitriol  to  make  muriatic  acid,  such  as  tinsmiths  use  in  solder- 
ing. They  can  be  recognized  anywhere  by  the  effect  of  thi 
poisonous  gases  they  are  compelled  to  breathe,  which  not  onl*' 
destroy  the  lungs,  but  attack  the  teeth,  causing  them  to  decay 
rapidly  and  fall  out.  A  salt-cake  man  has  no  teeth,  or  per- 
haps a  few  blackened  stumps  remain,  and  as  he  is  unable  to  chew 
his  food,  indigestion  as  well  as  diseased  lungs  adds  to  his  af- 


9St8  ECONOMICS 

flictions.  The  effect  of  this  work  is  noticeable  in  less  than  a 
year. 

In  another  building  are  men  shoveling  slacked  lime,  turning 
it  over  and  over  until  it  is  finally  loaded  into  the  lifts  that 
convey  it  to  a  chamber  where  it  is  treated  with  chlorine.  The 
white  particles  of  lime  are  in  the  air  all  about  them,  and  here 
again  each  has  a  big  bunch  of  oakum  in  his  mouth  to  prevent 
him  inhaling  the  irritating  and  burning  dust.  At  this  they  can 
work  only  twenty  minutes  at  a  time,  with  short  intervals  of 
rest,  for  a  shift  of  seven  hours.  After  the  day's  work  they  wash 
themselves  with  oil  or  tallow,  for  the  application  of  water  to 
their  faces  or  hands,  with  every  pore  filled  with  lime,  would  cause 
terrible,  if  not  fatal  burning.  At  this  work  there  is  a  tendency 
to  many  diseases  always  associated  with  the  handling  of  lime, 
and  blindness  from  the  alkaline  burning  is  not  uncommon. 

On  each  side  of  a  long  corridor  are  small  sheds  which  seem 
like  infirmaries  for  the  victims  of  the  deadly  gases  and  the 
corrosive  acids  and  dusts  of  the  works.  In  these  sheds  are  the 
half -blind  victims  of  lime-shoveling,  the  asthmatic  and  decrepit 
packers,  the  toothless  salt-cake  men  and  the  used-up  vat  men, 
barrow  men,  and  general  workers.  There  they  sit  day  after 
day,  breaking  the  stone  from  which  sulphur  is  to  be  extracted, 
and  the  click  of  their  hammers  has  won  for  them  the  jocular 
name  of  the  hand-bell  ringers.  This  is  the  last  occupation  about 
the  works,  and  as  the  men  weaken  at  it  they  are  removed  to  the 
workhouse,  their  places  being  filled  by  others  unfit  for  the  more 
arduous  occupations.  These  men  are  not  old,  for  the  work  is 
such  that  they  seldom  or  never  live  to  an  advanced  age.  Every 
branch  of  the  work  is  dangerous  and  destructive.^ 

The  wages  paid  in  such  occupations  are  very  high, 
but  even  the  highest  wage  for  such  work  is  entirely 
inadequate  remuneration  for  the  nearly  inevitable  sac- 
rifice of  life  and  strength  which  a  few  years  of  such 
employment  involves. 

i"A  Primer  of  Political  Economy,"  S.  T.  Wood,  p.  23. 


SYSTEMS  OF  PAYMENT  229 

178.  Supply  of  labor  depends  on  chances  of  success. 
— The  supply  of  labor  in  different  occupations  is  much 
influenced  by  the  chances  of  success.  Largely  because 
some  lawyers,  physicians  and  engineers  make  from 
$100,000  to  $500,000  a  year,  the  lower  ranks  of  these 
professions  are  crowded  with  men,  most  of  whom  are 
unfitted  for  their  work  and  will  never  make  more  than 
a  bare  living,  but  are  buoyed  up  until  the  age  of  ac- 
complishment is  passed  by  the  hope  of  success.  The 
sight  of  the  glittering  prizes  which  a  few  successful 
men  achieve  is  in  part  responsible  for  overcrowding 
the  professions.  The  same  influence  is  responsible  for 
the  oversupply  of  clerks  in  banks  and  brokerage  houses. 
There  are  thousands  of  young  men  working  in  the 
financial  districts  for  less  than  a  comfortable  subsistence, 
or  even  skimping  themselves  of  all  but  the  bare  necessi- 
ties in  order  to  hold  a  routine  position  in  some  banking 
or  brokerage  house,  from  which  they  believe  that,  as 
a  few  men  have  done,  they  may  rise  to  great  wealth. 

Social  esteem  and  a  dignified  position  in  the  com- 
munity influence  the  supply  of  labor  in  diff'erent  occu- 
pations. This  is  very  well  illustrated  by  the  attitude 
of  factory  communities  toward  difl'erent  classes  of 
working  girls.  Stenographers  and  clerks,  although 
they  may  be  paid  much  lower  wages  than  mill  hands, 
stand  on  a  higher  social  plane.  In  the  same  way 
young  men,  when  they  can  wear  white  shirts  at  their 
work,  and  keep  their  shoes  nicely  polished  and  their 
clothes  in  good  condition,  find  solace  and  compen- 
sation for  the  fact  that  a  good  mechanic  will  usually 
make  higher  wages  than  they  receive.  Other  illustra- 
tions of  the  same  principle  are  furnished  by  the  over- 
crowding of  the  teaching  and  ministerial  professions. 
Those  who  elect  these  callings  must  take  their  compen- 


«80  ECONOMICS 

sation  very  largely  in  dignity  and  social  esteem.  They 
find  quite  often  with  advancing  years  that  it  would  have 
been  wiser  for  them  to  have  substituted  cash  for  this 
peculiarly  unsubstantial  variety  of  credit. 

The  chances  of  advancement  influence  the  supply  of 
labor;  many  graduates  of  technical  schools,  for  ex- 
ample, are  willing  to  serve  in  subordinate  positions  in 
shops  and  mills  in  order  to  supplement  their  theoretical 
knowledge  by  practical  experience.  They  use  these 
subordinate  positions  as  stepping-stones  to  higher  posi- 
tions, and  so  increase  the  supply  of  labor  in  these  lower 
grades.  The  ranks  of  labor  in  all  positions  preparatory 
to  better  paid  work  are  apt  to  be  overcrowded  from  the 
same  cause,  and  the  wages  paid  in  such  occupations 
are  therefore  lower  than  if  they  were  not  looked  upon 
as  stepping-stones  to  higher  positions. 

179.  Sole  or  -partial  dependence  of  labor  on  wages 
received, — The  supply  of  labor  is  largely  influenced  by 
the  sole  or  partial  dependence  of  the  laborers  upon  the 
wages  received.  The  importance  of  this  influence  is 
illustrated  by  the  low  wages  paid  to  women.  The  ma- 
jority of  women  in  industry  are  unmarried  and  living 
at  home.  They  are  not,  as  a  rule,  entirely  dependent 
upon  their  earnings  for  support  and  are,  therefore, 
wilhng  to  work  for  lower  wages  than  they  would  other- 
wise demand.  This  fact  is  responsible  for  the  system 
which  prevails  in  the  clothing  trades  known  as  the 
* 'sweating"  system,  where  most  of  the  work  is  done  in 
the  homes  and  is  passed  through  various  grades  of  sub- 
contractors. Each  one  of  these  "sweaters"  is  working 
on  a  narrow  margin  of  profit  and  is  compelled  to  take 
every  advantage  of  the  worker  who  is  usually  required 
to  call  his  entire  family  to  his  assistance  before  he  can 
make   decent   wages.     Women's   wages    are   also   in- 


SYSTEMS  OF  PAYMENT  «81 

fluenced  in  many  cases,  it  is  claimed,  by  their  relative 
inefficiency,  which  is  due  to  their  lack  of  permanent  in- 
terest in  their  work.  Most  unmarried  women  expect 
or,  at  any  rate,  hope  to  marry.  On  this  account,  they 
do  not  devote  themselves  to  any  calling  with  the  same 
zeal  and  energy  as  they  would  if  they  expected  it  to  be 
their  life  work. 

This  is  well  illustrated  by  the  teaching  profession. 
From  time  to  time,  there  has  been  an  agitation  in  favor 
of  paying  the  same  wages  to  women  teachers  as  to  the 
small  number  of  men  who  can  be  attracted  into  this 
most  important  of  all  the  professions.  These  attempts 
have  generally  been  unsuccessful,  however,  and  the 
main  reason  given  for  refusing  equal  payment  to 
women  teachers  is  that  high  salaries  are  wasted  on  them. 
The  community,  it  is  claimed,  does  not  receive  a  return 
in  their  increasing  efficiency,  since  their  places  have  con- 
stantly to  be  filled  by  new  recruits.  A  recent  writer  on 
the  subject  proposes  as  a  solution  of  the  problem  a 
frank  recognition  of  the  fact  that  a  woman  should  not  be 
retained  in  teaching  beyond  the  age  of  thirty  years,  and 
that  up  to  that  point  she  should  be  paid  unusually  high 
wages  in  order  to  attract  talent  and  stimulate  interest. 


CHAPTER  V 

LABOR  ORGANIZATIONS 

180.  The  trade  union  and  the  supply  of  labor. — The 
most  important  influences  upon  the  supply  of  skilled 
labor  are  the  trade  unions.  These  are  voluntary  unin- 
corporated associations  which  have  been  formed  in 
almost  every  trade  by  workmen  who  desire  to  improve 
their  position  in  bargaining  with  their  employers.  The 
justification  of  labor  organizations  is  fundamentally  the 
inequality  in  bargaining  ability  between  employer  and 
employe.  The  employer  has  on  his  side  all  the  ad- 
vantages of  wealth,  position  and  training.  The  em- 
ploye is  poor,  usually  living  from  hand  to  mouth;  he  is 
ignorant,  and  his  bargaining  ability  is  small.  If  we 
assume  that  in  making  such  an  important  bargain  as  the 
wage  contract  involves,  there  should  be  an  equality  of 
capacity  between  two  parties,  we  must  approve  the 
organization  of  workmen  so  that  they  can  deal  with 
their  employer,  not  as  single  men,  but  as  an  organized 
body  whose  representatives  can  meet  and  treat  with  the 
employer  on  an  equal  footing. 

Trade  unions  are  of  two  kinds,  but  of  substantially 
the  same  form  of  organization.  The  first  is  where  men 
following  a  particular  trade  form  themselves  into  a 
union,  for  example,  bricklayers,  carpenters,  steam-fit- 
ters or  stationary  engineers;  the  second  are  known  as 
industrial  unions  and  include  all  occupations  in  a  par- 
ticular industry.  Illustrations  of  industrial  unions  are 
the  Garment  Workers  of  America,  the  United  Mine 

232 


LABOR  ORGANIZATIONS  233 

Workers  of  America,  the  Amalgamated  Association  of 
Iron,  Steel  and  Tin  Workers. 

181.  Form  of  organization  of  union. — The  following 
description  of  the  condition  of  the  United  Mine  Work- 
ers of  America  by  Dr.  Frank  J.  Warne,  in  his  book 
"The  Coal  Mine  Workers,"  will  apply,  with  minor 
changes,  to  all  of  the  large  unions: 

In  many  of  its  features  the  general  scheme  of  organization  of 
the  United  Mine  Workers  of  America  bears  a  close  resemblance 
to  that  of  our  political  organization.  It  is  made  up  of  national, 
district  (state),  sub-district,  and  local  unions.  The  national 
union,  of  which  there  is  but  one,  is  designed  to  have  jurisdiction 
over  all  the  coal  mine  workers  of  the  United  States,  although 
recently  it  has  also  been  extended  into  British  Columbia.  In 
consequence  of  this  inclusion  of  the  miners  of  the  Dominion,  the 
1906  Convention  amended  the  organization's  constitution  by 
substituting  the  term  international  for  national.  There  are  23 
distinct  unions,  approximately  35  sub-district  unions,  and  about 
2,700  local  unions. 

Subject  to  the  constitution  of  the  national  union  and  the 
legislation  of  the  national  convention,  the  district  union,  as  a 
general  statement,  has  jurisdiction  over  a  particular  state.  This 
is  due  largely  to  the  convenience  of  state-line  divisions.  There 
are  exceptions,  however.  In  Pennsylvania,  for  example,  owing 
to  the  unusual  importance  of  the  coal  producing  area  of  that 
state,  there  are  six  districts — Numbers  1,  7  and  9,  covering  the 
anthracite  region;  District  2,  in  the  Clearfield  or  central  soft- 
coal  field;  District  5,  in  the  Pittsburgh  or  western  bituminous 
coal  field;  and  District  16,  which  also  includes  Maryland.  In 
Indiana,  District  8  covers  the  block-coal  field,  and  District  11 
the  bituminous  coal  territory  of  that  state.  In  a  few  cases  one 
district  extends  over  more  than  one  state — District  15  takes  in 
Utah,  Colorado  and  New  Mexico ;  District  17  includes  Virginia 
as  well  as  West  Virginia;  District  21  takes  in  Arkansas, 
Oklahoma  and  Texas;  and  District  22  covers  both  Montana 
and  Wyoming. 


234  ECONOMICS 

Under  the  constitution  and  legislation  of  the  district  union 
are  sub-district  and  local  unions.  The  sub-district  union  has 
been  made  a  feature  of  the  organization  in  order  that  special 
regulation  may  be  secured  in  particular  cases  for  varying  con- 
ditions, which  prevail  in  almost  every  state,  without  placing  the 
whole  district  in  jeopardy  when  only  small  areas  are  affected. 
The  local  union  is  the  unit  making  up  the  sub-district,  district 
and  national  unions,  and  naturally  is  the  smallest  in  member- 
ship of  the  four  unions.  One  local  union  usually  has  jurisdic- 
tion over  the  mine  workers  at  a  particular  colliery  or  mine.  It 
must  have  at  least  ten  members. 

Over  all  the  unions  the  constitution  and  legislation  of  the 
national  union  are  supreme.  In  those  states  where  a  joint  con- 
ference between  representatives  of  operators  and  mine  workers 
has  been  established,  the  provisions  of  its  agreement  take  prece- 
dence over  the  constitution  and  by-laws  of  the  district,  sub- 
district,  and  local  unions,  and  are  second  only  to  the  legislation 
of  the  national  convention.  Outside  these  joint  agreements  and 
the  constitution  and  legislation  of  the  national  union,  the  district 
exercises  authority  and  governing  surveillance  over  the  sub-dis- 
tricts and  locals.  Each  union,  however,  has  its  own  constitu- 
tion and  by-laws,  its  own  officers  and  conventions,  and  legislates 
for  its  own  particular  area  and  group  within  the  authority 
granted  to  it. 

182.  The  United  Mine  Workers  of  America. — Dr. 
Warne  writes  further  of  this  organization  as  follows: 

The  United  Mine  Workers  of  America  is  one  of  the  most  demo- 
cratic, with  the  possibility  of  at  once  becoming  one  of  the 
most  autocratic,  of  any  organization  in  the  world.  It  is  demo- 
cratic in  the  sense  that  in  the  final  analysis  its  policy  and  man- 
agement are  in  the  hands  of  its  members.  All  power  vests  with 
them  in  their  collective  capacity.  To  them,  in  their  local  unions, 
every  great  question  ajffecting  the  national,  district,  and  sub- 
district  unions  is  referred  sooner  or  later;  from  the  local  unions 
— from  the  active,  every-day  workers  in  the  coal  mines — come 


LABOR  ORGANIZATIONS  «86 

the  final  decisions  on  all  such  questions.  They  nominate  and 
elect,  by  direct  vote  of  the  members,  the  president,  vice-president, 
and  secretary-treasurer;  they  indirectly,  through  their  par- 
ticular districts,  elect  the  members  of  the  national  executive 
board ;  they  choose  the  delegates  that  make  up  the  national  con- 
vention ;  they  send  instructions  to  this  convention  upon  most  of 
the  recommendations  made  to  that  body  by  the  president  of  the 
national  union ;  they  instruct  their  delegates  how  they  are  to 
vote ;  they  not  only  choose  the  national  and  their  own  local  oflS- 
cers,  but  through  regularly  elected  delegates  they  compose  the 
sub-districts  and  districts,  and  through  these  determine  the  policy 
that  is  to  be  adopted  in  any  particular  instance. 

183.  The  national  convention. — The  same  writer  thus 
describes  the  annual  convention  held  by  this  union : 

Once  a  year  representatives  of  the  local  unions  meet  in  regu- 
lar convention  as  the  national  union,  usually  at  Indianapolis, 
beginning  the  third  week  in  January,  and  for  ten  days  cr  two 
weeks,  outline  the  policy  of  the  national  union  for  the  ensuing 
year.  This  convention  possesses  absolute  power ;  there  is  noth- 
ing affecting  the  organization  it  cannot  do,  even  to  altering  or 
amending  its  fundamental  law — the  constitution.  It  can  even 
abrogate,  if  it  so  chooses,  the  agreement  of  the  interstate  joint 
conference.  Its  delegates  are  elected  directly  by  the  local 
unions  on  the  basis  of  one  vote  in  the  convention  for  each  one 
hundred  members  (or  less),  and  an  additional  vote  for  each  one 
hundred  members  or  majority  fraction  thereof.  No  representa- 
tive, however,  can  cast  more  than  five  votes  on  any  question.  In 
the  1905  convention,  there  was  a  total  of  1,057  locals  represented 
by  the  delegates  who  cast  1,877  votes.  The  representative  must 
be  "a  miner  or  mine  worker  or  employed  by  the  organization" 
and  a  member  in  good  standing  of  a  local  union  in  the  district 
he  represents  (Section  2,  Article  V,  of  the  constitution).  The 
constitution  of  the  national  union  interprets  the  term  "miner 
or  mine  worker"  as  meaning  "any  one  working  in  or  around  the 
mines  and  a  member  of  a  local  union."  Any  member  of  the 
United  Mine  Workers  occupying  a  position  other  than  that  of 


236  ECONOMICS 

miner  or  mine  worker,  excepting  those  holding  positions  with 
the  organization  or  with  any  other  affiliated  union,  is  ineligible 
as  representative  to  any  sub-district,  district,  or  national  conven- 
tion, nor  can  such  member  represent  the  United  Mine  Workers 
in  a  central  body  or  state  Federation  of  labor  convention.  The 
object  of  this  constitutional  provision  is  to  safeguard  the  unions 
from  possible  domination  by  men  under  the  influence  of  their 
employers.  Special  conventions,  the  delegates  to  which  must 
possess  the  above  qualifications,  are  provided  for  by  the  consti- 
tution. The  purpose  of  the  national  convention  is  to  legislate 
on  any  question  pertaining  to  the  objects  of  the  organization.^ 

184.  Objects  of  the  trade  union. — The  objects  of  the 
United  Mine  Workers  organization  is  stated  as  follows 
in  the  preamble  to  the  constitution: 

"There  is  no  fact  more  generally  known,  or  more  widely  be- 
lieved," says  this  preamble,  "than  that  without  coal  there  would 
not  have  been  any  such  grand  achievements,  privileges  and 
blessings  as  those  which  characterize  the  twentieth  century  civil- 
ization, and  believing  as  we  do,  that  those  whose  lot  it  is  to  daily 
toil  in  the  recesses  of  the  earth,  mining  and  putting  out  this  coal 
which  makes  these  blessings  possible,  are  entitled  to  a  fair  and 
equitable  share  of  the  same ;  therefore,  we  have  formed  'The 
United  Mine  Workers  of  America'  for  the  purpose  of  the  more 
readily  securing  the  objects  sought  by  educating  all  mine  work- 
ers in  America  to  realize  the  necessity  of  unity  of  action  and  pur- 
pose, in  demanding  and  securing  by  lawful  means  the  just  fruits 
of  our  toil." 

Under  this  general  purpose  are  included  shortening  of 
the  hours  of  labor,  raising  of  wages,  the  securing  of 
legislation  favorable  to  the  interests  of  the  workingmen 
and  the  general  improvement  of  the  social  and  economic 
conditions  of  their  members. 

185.  The  trade  agreement. — Whenever  possible  the 

1  Frank  J.  Warne,  "  The  Coal  Mine  Workers,  p.  2. 


LABOR  ORGANIZATIONS  £37 

union  endeavors  to  make  wage  contracts  for  all  of  its 
members  covering  terms  and  conditions  of  employment 
for  a  given  period.  An  illustration  of  such  an  agree- 
ment is  contained  in  the  following  provisions  as  to  the 
payment  for  coal  mining  in  the  agreement  between  the 
United  Mine  Workers  and  the  bituminous  operators 
signed  at  Indianapolis,  April  1,  1904: 

That  the  Interstate  agreement  of  the  present  year  shall  be  con- 
tinued with  the  same  conditions  for  two  years  from  April  1, 
1904,  until  March  31,  1906.  with  the  following  exceptions,  to 
wit: 

First.  That  the  price  for  mining  be  reduced  five  (5)  cents  per 
ton  on  inch-and-a-quarter  (l^i)  screened  lump  coal,  pick- 
mining,  in  western  Pennsylvania  thin  vein,  the  Hocking,  the  bas- 
ing district  of  Ohio,  and  in  both  block  and  bituminous  districts 
of  Indiana;  three  (3)  cents  per  ton  on  mine-run  coal,  pick-min- 
ing in  the  bituminous  district  of  Indiana,  and  at  Danville,  the 
basing  point  of  Illinois. 

Second.  That  the  price  for  machine-mining  be  reduced  four 
(4)  cents  per  ton  on  screened  lump  coal  in  western  Pennsylva- 
nia thin  vein,  and  the  Hocking,  the  basing  district  of  Ohio; 
five  (5)  cents  per  ton  on  screened  lump  coal  in  the  block  and 
bituminous  district  of  Indiana,  and  three  (3)  cents  per  ton  on 
mine-run  coal  in  the  bituminous  district  of  Indiana,  and  at  Dan- 
ville, the  basing  point  of  Illinois. 

Third.  That  the  inside  day-wage  scale  shall  be  as  follows, 
with  the  conditions  of  the  Columbus  day-wage  scale  agreement 
of  1898,  to  wit : 

Tracklayers     9^.43 

Tracklayers'  helpers   2,23 

Trappers    I.O61/3 

Bottom  cagers    2.42 

Drivers     2.43 

Trip  riders   2.42 

Water  haulers  and  machine  haulers 2.42 

Timbermen  (where  such  are  employed) 2.49 


2S8  ECONOMICS 

Pipemen,  for  compressed-air  plants $2.36 

Company  men  in  long-wall  mines  of  third  vein 

district,    northern    Illinois 2.23 

All  other  inside  day  labor 2.23 

Fourth.  That  yardage  and  dead-work  be  reduced  in  the  same 
proportion. 

Fifth.  That  internal  differences  in  any  of  the  states  or  dis- 
tricts, both  as  to  prices  and  conditions,  shall  be  referred  to  the 
states  or  districts  affected  for  adjustment. 

Further,  in  pursuance  of  the  authority  vested  in  us,  we 
hereby  call  a  joint  convention  of  the  coal  operators  and  min- 
ers of  western  Pennsylvania,  Ohio,  Indiana,  and  Illinois,  to  meet 
at  Indianapolis,  Indiana,  at  10  o'clock  a.  m.,  January  25,  1906. 

In  addition  this  contract  settled  the  "basing  point," 
in  each  state  concerned,  for  work  about  the  mines ;  fixed 
upon  2,000  pounds  as  a  ton  for  the  entire  central 
competitive  fields  included  in  the  agreement ;  recognized 
the  two  general  methods  of  fixing  rates  upon  a  screened 
coal  of  mine-run  basis;  agreed  upon  regulation  screens 
where  the  screen  method  is  in  use;  established  a  differ- 
ential between  machine  and  pick-mining  under  which- 
ever method  employed,  between  punching  and  chain- 
machine  mining,  between  thick  and  thin-vein  pick 
mining ;  and  made  eight  hours  a  day's  work  for  all 
classes  of  mine  employes.  This  agreement  settled  for 
a  time  almost  every  important  question  which  could  arise 
between  employer  and  employe  in  the  soft  coal  in- 
dustry. 

Such  agreements  are  generally  observed  with  fidelity 
on  both  sides.  The  employers  are  responsible  persons 
and  can  be  held  to  their  agreements  by  process  of  law. 
On  the  other  hand,  a  most  pertinent  criticism  of  the 
unincorporated  labor  union  is  its  irresponsibility.  In 
several  very  noteworthy  instances,  especially  during  the 


LABOR   ORGANIZATIONS  239 

anthracite  strike  of  1902,  organized  labor  has  refused, 
even  under  pressure  of  apparent  necessity,  to  abide  by 
the  letter  of  its  agreements.  Minor  violations  of  agree- 
ments are  constantly  occurring  on  both  sides,  but  in 
general  they  are  faithfully  observed,  and  are  most  satis- 
factory to  both  sides.  Especially  do  employers  favor 
the  method  of  collective  bargaining  because  it  enables 
them  to  go  ahead  with  their  calculations  on  the  basis  of 
a  fixed  labor  cost  which  they  know  will  not  be  disturbed 
during  the  life  of  the  contract. 

186.  Contests  between  employer  and  employ S. — In 
only  a  limited  number  of  cases,  however,  are  these 
wage  agreements  made.  Generally  speaking,  there  is 
a  certain  amount  of  conflict  and  contest  between  em- 
ployer and  employe  on  a  variety  of  matters.  A  labor 
organization,  no  matter  whether  a  collective  bargain  is 
made  or  not,  is  active  in  behalf  of  its  members.  Its 
local  representatives  circulate  through  the  shops  where 
the  members  are  employed,  and  hear  any  complaints 
which  they  may  have  to  make  of  ill  treatment  or  in- 
justice at  the  hands  of  foremen  or  employers.  If,  for 
example,  a  man  is  discharged,  and  does  not  consider 
that  he  has  been  at  fault,  he  appeals  to  the  shop  com- 
mittee, who  take  up  his  grievance  with  the  superin- 
tendent and  endeavor  to  secure  his  reinstatement.  The 
shop  committee  also  investigate  wage  conditions,  and 
if  they  consider  that  members  have  a  legitimate 
grievance,  they  will  endeavor  to  secure  its  correction. 
The  union  is  also  represented  in  these  negotiations  with 
employers  by  walking  delegates,  who  are  district  super- 
intendents, visiting  a  number  of  shops  and  mills  and 
conferring  with  the  local  representatives. 

If  an  agreement  on  any  matter  of  dispute  is  not 
reached  after  conference  with  the  employer,  the  matter 


240  ECONOMICS 

may  be  taken  up  by  the  various  governing  boards  of 
the  union,  each  one  in  turn  endeavoring  to  reach  a 
basis  of  settlement.  When  it  reaches  the  district  board 
or  the  national  board,  according  to  the  importance  of 
the  case  and  the  constitution  of  the  union,  an  ultimatum 
is  issued  to  the  offending  employer  and  he  is  threatened 
with  a  strike. 

1C7.  The  strike. — The  strike  is  one  of  the  most 
familiar  of  American  industrial  phenomena.  It  is 
simply  the  refusal  of  a  number  of  workingmen,  usually 
organized,  to  sell  their  labor  for  less  than  a  stipulated 
price,  or  to  work  under  other  than  specified  employment, 
coupled  with  the  refusal  of  the  purchasers  of  the  labor 
— the  employer — to  accede  to  the  demand.  A  peaceful 
and  sane  method  is  the  method  of  collective  bargaining, 
which  has  already  been  described.  This  may  be  likened 
to  arbitration  in  the  settlement  of  international  disputes. 
On  the  other  hand,  just  as  in  differences  between 
nations,  when  negotiations  fail,  we  have  war.  The 
strike  is  a  condition  of  industrial  warfare. 

The  following  description  of  the  strike  by  Dr.  Warne 
gives  a  fair  and  accurate  representation  of  the  working 
of  industrial  warfare  from  the  standpoint  of  a  disinter- 
ested observer. 

Realizing  that  the  primary  object  of  a  trade  union  in 
inaugurating  a  strike  is  to  secure  a  specified  wage  and  well- 
defined  conditions  of  employment,  its  first  object  is  to  control  the 
law  of  competition  in  that  particular  industry  so  that  labor 
cannot  be  sold  there  for  less  than  the  wages  asked  or  under 
other  than  the  specified  conditions  of  employment.  To  do 
this  the  employes  in  that  industry  must  first  be  persuaded  to 
refuse  to  sell  their  labor  except  upon  the  union's  terms.  This 
is  secured  from  some  by  their  becoming  members  of  the  union 


LABOR  ORGANIZATIONS  241 

and  abiding  by  its  rules  and  regulations,  and  this  is  accom- 
plished usually  through  the  organizers — the  "agitators"  or 
"walking  delegates"  as  some  would  have  them  called.  It  is  safe 
to  say  that  no  strike  can  be  inaugurated  with  any  prospect  of 
its  success  unless  a  considerable  number  of  the  employes  are 
bound  together  in  a  community  of  interest  to  support  actively 
the  demands  of  the  union.  These  men  form  the  nucleus  of  the 
Trade  Union  and  are  a  powerful  entering-wedge  in  persuading 
others  who  sell  their  labor  in  the  same  market,  to  raise  its  price 
or  to  refuse  to  lower  the  price,  as  the  case  may  be.  This  is  done 
by  creating  a  public  sentiment  among  the  group  of  workers  and 
in  the  particular  community  through  mass  meetings,  addresses 
and  proclamations  of  the  leaders,  by  boycotting,  picketing, 
ostracism,  marches,  and  in  innumerable  other  ways  devised  as 
occasion  may  arise. 

188.  Picketing  in  strikes. — In  controlling  the  ordinary  supply 
of  labor  in  the  industry,  committees  of  union  men  visit  personally 
every  man  employed  who  has  not  already  been  captured  by  the  or- 
ganizers, and  his  position  is  definitely  ascertained.  This  is  one 
of  the  most  important  uses  of  picketing,  by  means  of  which  men 
are  met  on  their  way  to  and  from  work,  the  pickets  being  located 
at  their  homes,  around  the  collieries,  and  along  the  highway,  or 
wherever  there  is  the  possibility  of  meeting  men  who  continue 
at  work.  So  severe  was  the  picketing  in  the  strike  of  1903 
in  the  anthracite  fields  that  many  of  the  mining  companies  sur- 
rounded their  collieries  with  high  board  fences,  having  strands 
of  barbed  wire  strung  along  the  top.  Guards  at  the  entrances 
prevented  access  to  the  men  at  work,  who  remained  inside  the 
grounds  day  and  night.  In  fact,  some  collieries  became  regular 
stockades.  With  the  employes  continuing  at  work  the  pickets 
at  first  have  recourse  to  the  powers  of  friendly  and  peaceable 
persuasion,  but  if  these  fail  to  induce  the  men  to  join  the 
union,  or,  if  not  this,  at  least  to  remain  away  from  work,  then 
upon  the  non-union  men  are  brought  to  bear  social  forces 
verging  upon  lawlessness,  and  overstepping  the  safeguards 
the  state  has  thrown  around  individual  liberty,  which  only  a 

1—16 


242  ECONOMICS 

strong  public  sympathy  with  the  cause  of  the  union  will  support. 
The  more  important  of  these  social  forces  are  ostracism  and 
boycotting,  with  their  accompanying  manifestations. 

189.  Ostracism. — Ostracism  is  a  stronger  social  force  in  main- 
taining a  high  standard  of  personal  conduct  than  most  of  us  real- 
ize. It  means  banishment  or  exclusion  from  social  intercourse  or 
favor,  and  is  usually  employed  by  a  particular  group  against 
members  of  its  own  class  or  craft.  Its  most  effective  weapon 
is  some  terra  of  reproach  coined  for  the  purpose.  Lawyers, 
for  example,  who  do  not  come  up  to  the  standard  set  for  that 
profession  by  its  dominant  group,  are  ostracised  and  termed 
"shysters."  So  it  is  with  the  medical  profession,  physicians  en- 
gaged in  questionable  practices  which  the  dominant  group  de- 
nounce are  ostracised  by  the  more  reputable  practitioners  with 
the  reproachful  term  "quack."  The  same  social  force  is  at 
work  among  the  industrial  classes.  Union  men  set  a  standard 
as  to  wages  and  conditions  of  employment  in  a  particular  indus- 
try, and  those  workingmen  who  fall  below  that  measurement  in 
offering  their  labor  for  a  less  price,  are  ostracised  and  denounced 
as  "scabs."  Whether  the  group  be  doctors  or  lawyers  or  work- 
ingmen, whatever  it  adopts  as  the  standard  of  measuring  con- 
duct along  particular  lines  is  sooner  or  later  taken  up  by  the 
broader  social  grouping  in  the  community  and  accepted  as  its 
standard  of  judgment.  This  is  particularly  and  strikingly  true 
of  a  community  closely  identified  with  an  industry,  the  liveli- 
hood of  whose  members  depends  upon  the  industry's  activities, 
and  in  which  a  dominant  group  (usually  members  of  a  trade 
union)  creates  the  industrial  standard.  This  explains  the  atti- 
tude of  hostility  an  industrial  community  exercises  towards  the 
"scab."  It  explains,  also,  perhaps,  how  men  far  removed  from 
the  influence  of  the  working  classes  can  look  upon  the  "scab"  as 
*'a  hero." 

190.  Illustrations  of  ostracism. — The  social  force  of  ostra- 
cism, put  into  operation  by  the  working  of  the  trade  union,  is  di- 
rected, and  particularly  so  in  strike  times,  not  only  against  the 
"scab"  himself,  but  also  along  all  those  channels  of  social  rela- 
tions affecting  him  and  which  might  have  influence  upon  him  in 


I 


LABOR  ORGANIZATIONS  243 

bringing  about  action  conformable  to  the  standard  of  the  domi- 
nant group.  The  strength  of  this  weapon  in  the  strike  of  the 
anthracite  mine  employes  in  1902  caused  union  men  and  their 
families  to  refuse  to  associate  with  the  workingman  who  con- 
tinued his  employment  in  the  mines ;  it  expelled  a  prominent  and 
otherwise  highly-respected  citizen  from  a  benevolent  society 
which  had  for  its  object  the  assisting  of  sick  members  and  the 
defraying  of  a  part  of  the  funeral  expenses  of  those  who  died, 
and  of  which  he  had  been  a  member  in  good  standing  for  more 
than  twenty-seven  years ;  it  forced  a  member  of  a  temperance  so- 
ciety who  had  been  faithful  and  active  for  twelve  years  to 
resign ;  it  caused  children  of  striking  mine  workers  not  only  to 
refuse  to  attend  the  school  of  a  woman  teacher  whose  aged 
father  was  a  watchman  at  one  of  the  mines,  but  they  also  de- 
manded that  she  be  discharged.  Children  of  union  miners  would 
not  attend  Sunday  school  with  their  former  playmates  whose 
relatives  continued  at  work ;  members  of  the  Lacemakers'  Union 
employed  at  a  silk-mill  refused  to  work  alongside  girls  whose 
fathers  and  brothers  would  not  strike ;  clerks  were  dismissed  from 
stores  and  business  establishments  because  they  were  related  to 
men  who  continued  at  work  in  the  mines ;  congregations  in  more 
than  one  religious  denomination  were  split  into  factions  by 
union  members  refusing  to  worship  alongside  non-union  mine 
workers;  even  promises  of  marriage  were  broken  through  rela- 
tives of  one  or  the  other  contracting  parties  being  non-union 
workers. 

The  "scab"  was  not  infrequently  held  up  to  public  scorn  and 
ridicule  by  the  publication  of  his  name  in  the  "unfair  list" 
of  the  newspapers  in  the  mining  towns  as  being  "unfit  to  asso- 
ciate with  honorable  men" ;  he  was  represented  by  name  on 
signs  attached  to  effigies  dangling  from  electric-light,  telegraph, 
and  telephone  poles  and  wires  and  from  trees  in  front  of  his 
home  and  along  the  highways  and  streets;  a  grave  in  his  yard 
with  his  name  placed  upon  the  board  at  the  head  to  represent  a 
tombstone  not  infrequently  confronted  him;  the  sign  of  "the 
skull  and  cross-bones"  was  painted  on  his  house,  and  in  innu- 
merable  other  ways,   conceivable   only   by   workingmen   whose 


244  ECONOMICS 

imaginative  faculties  have  been  aroused  by  the  desire  for  perse- 
cution of  others  who  oppose  a  cause  which  is  so  vital  to  their 
home  and  family,  was  created  a  public  sentiment  against  the  non- 
union employe.^ 

191.  The  strike  an  effective  weapon. — The  strike  is 
the  only  weapon  which  the  union  has  to  enforce  its  de- 
mands, but  it  is  a  very  powerful  weapon.  It  may  be 
confined  to  a  single  shop,  or,  in  case  the  executive  offi- 
cers deem  it  necessary,  the  strike  may  be  extended 
throughout  the  entire  industry,  thus  involving  employers 
who  have  no  connection  with  the  dispute  which  brought 
on  the  strike.  Most  of  the  unions  collect  from  the  dues 
of  their  members  "defense  funds"  out  of  which  the  needy 
among  the  families  of  strikers  are  supported.  During 
the  anthracite  coal  miners'  strikes  of  1900  and  1902, 
the  bituminous  coal  miners  kept  at  work  and  their  earn- 
ings were  largely  increased  by  reason  of  the  decreased 
supply  of  anthracite  coal,  for  which  bituminous  coal 
had  to  be  substituted.  Out  of  these  increased  earnings 
they  made  large  contributions  to  the  support  of  their 
members  in  the  anthracite  region.  When  the  strikers 
succeed  in  winning  the  support  of  public  opinion,  as  in 
the  cases  just  mentioned,  they  have  secured  large  sums 
by  public  subscription. 

192.  Situation  of  the  employer  under  competition. — 
The  success  of  the  strike  depends  very  largely  on  the 
situation  of  the  employer  and  especially  on  his  relation 
to  other  employers  in  the  same  industry.  The  writer 
has  elsewhere  stated  the  employer's  situation  in  dis- 
cussing the  advantages  of  combinations  among  employ- 
ers in  dealing  with  labor  as  follows: 

"One  final  advantage  secured  by  combination  deserves 
special  notice.     This  is  the  improved  position  of  the 

1  Frank  J.  Warne,  "The  Coal  Mine  Workers." 


LABOR  ORGANIZATIONS  245 

manufacturer  in  dealing  with  labor.  From  the  man- 
ufacturer's standpoint  the  insistent  demand  of  organized 
labor  for  high  wages  and  short  hours  is  equivalent  to 
a  demand  that  the  manufacturer  should  submit  to  a 
reduction  of  his  profit.  These  demands  his  business 
training  teaches  him  to  resist.  Under  the  system  of 
competition,  however,  in  resisting  the  demands  of  his 
employes,  he  is  placed  at  a  serious  disadvantage.  For 
these  employes  are  organized  into  great  unions  contain- 
ing 20,000,  40,000,  90,000  or  even  250,000  men,  under 
the  control  of  a  single  executive  board,  which  secures 
a  united  action  of  the  entire  membership  of  the  union 
upon  any  matter  of  common  interest.  Competition  in 
the  field  of  skilled  labor  has  been  largely  eliminated, 
and  well-organized  combination  has  long  since  taken 
its  place.  These  contests  between  employer  and  em- 
ployes are  unequal.  The  manufacturer  has  pressing 
obHgations  to  meet  by  the  sale  of  his  product;  in  order 
to  meet  these  obligations,  he  must  fill  his  contracts  and 
hold  his  customers.  His  financial  position  is  not 
strong  enough  to  permit  a  long  continued  suspension 
of  his  plant.  He  is  hard  pressed  by  competitors  who 
are  doing  their  utmost  to  persuade  his  customers  away 
from  him.  He  stands  alone,  struggling  for  business 
with  concerns  whose  hands  are  against  him,  as  his  hands 
are  against  all  his  rivals. 

193.  Strong  position  of  the  union  in  negotiating  with 
competitors. — "To  the  manufacturer  in  this  situation 
comes  an  official  of  the  International  Association  of 
Machinists,  or  of  the  Amalgamated  Association  of  Iron 
and  Steel  Workers,  or  the  Iron  Moulders'  Union  of 
America,  with  a  peremptory  demand  for  a  reduction  of 
hours,  or  an  increase  in  wages,  or  the  admission  of  walk- 
ing delegates  to  the  shop,  or  the  limitation  of  the  number 


246  ECONOMICS 

of  apprentices,  or  the  discharge  of  all  non-union  men. 
All  or  any  number  of  these  demands  may  be  made  upon 
the  manufacturer ;  if  he  refuses  a  strike  is  the  alternative. 
His  men  will  walk  out  at  a  word  from  their  general 
officers,  and  there  will  be  none  to  take  their  places. 

"The  business  instincts  of  the  manufacturer  lead  him 
to  refuse  an  advance  in  wages  as  he  would  resist  an 
increase  in  the  appraisal  of  his  plant  for  purpose  of 
taxation.  He  may  feel  that  his  men  are  receiving  high 
wages — perhaps  the  proposition  is  to  raise  them  from 
$3.50  to  $4  per  day.  He  looks  upon  the  proposed  re- 
duction in  hours  as  equivalent  to  a  reduction  of  output, 
opposed  not  merely  to  his  own  interests,  but  to  those 
of  his  employes.  A  demand  that  outsiders  should  dic- 
tate the  management  of  his  business  he  regards  as 
effrontery.  His  judgment  is  unalterably  opposed  to 
granting  the  demands  of  the  union. 

"Each  one  of  his  competitors  may  feel  the  same  way. 
In  the  absence  of  competition,  they  would  unanimously 
refuse  to  make  the  concessions  demanded.  They  would 
even  welcome  a  strike  as  offering  an  opportunity  to 
break  the  power  of  the  union.  They  would  concentrate 
their  efforts  on  the  plants  in  which  the  union  was  weak- 
est, sending  thither  all  non-union  men  that  could  be 
secured,  filling  as  many  orders  as  possible  from  these 
plants,  and  appealing  to  the  sympathy  of  their  cus- 
tomers to  induce  them  to  be  patient  with  the  delay 
involved  in  breaking  the  strike.  They  would  collect  a 
large  defense  fund,  scour  the  country  for  non-union 
men,  educate  unskilled  labor  into  a  knowledge  of  ma- 
chines and  processes,  secure  the  assistance  of  the  courts 
in  protecting  non-union  men  from  interference,  and,  by 
gradually  increasing  their  working  force,  they  would 
reopen  first  one  mill  and  then  another.      Finally  the 


LABOR  ORGANIZATIONS  «4i7 

reserve  funds  of  the  strikers  would  be  exhausted,  their 
courage  weakened  by  such  determined  resistance,  their 
confidence  in  their  leaders  impaired,  and  the  solid  wall 
of  their  resistance  honeycombed  with  disaffection,  until, 
first  singly,  and  then  by  hundreds,  the  strikers  would  be 
clamoring  for  reinstatement  on  the  old  terms,  the  union 
officials  compelled  to  surrender  to  save  their  organiza- 
tion, would  concede  their  defeat  and  make  an  abject 
surrender.  Such  would  be  the  usual  result  of  general 
strikes  were  unanimous  action  among  employers  to  be 
secured. 

194.  Common  action  among  employers  impossible 
under  competition. — "Under  competition,  however,  such 
unanimous  action  is  next  to  impossible  to  attain.  Few 
employers  feel  safe  in  standing  out  against  the  union, 
and  thus  precipitating  a  strike,  for  fear  lest  some  of  their 
competitors  should  grant  the  demands,  keep  their  mills 
running,  and  get  the  orders  which  the  strike  prevented 
them  from  executing  or  accepting,  and  in  the  profits 
from  which,  these  competitors  might  find  ample  com- 
pensation for  the  concessions  in  wages  and  hours  which 
had  been  made  to  secure  this  increased  business  from 
less  complaisant  rivals.  Especially  with  the  owners  of 
the  weaker  mills  do  such  considerations  have  weight. 
They  hasten  to  take  advantage  of  an  opportunity  to 
secure  the  trade  of  the  best  mills,  which  are  usually  the 
last  to  grant  the  demands  of  the  strikers.  In  the  strike 
of  the  International  Association  of  Machinists,  in  1901, 
a  large  number  of  the  strikers  almost  immediately  ob- 
tained the  nine-hour  day,  but  they  were  most  of  them 
employed  in  the  smaller  shops,  which  took  this  easy,  if 
short-sighted,  method  to  fill  their  books  with  orders. 

"Combination  was,  on  the  foregoing  account,  greatly 
desired  by  manufacturers  in  order  that  by  its  means 


248  ECONOMICS 

the  menacing  growth  of  the  power  of  organized  labor 
might  be  checked,  and  the  manufacturers,  freed  from 
the  hobbles  of  mutual  distrust  and  suspicion  which  com- 
petition had  fastened  upon  them,  might  stand  firmly 
together  against  what  they  believed  to  be  the  unreason- 
able demands  of  the  unions."  ^ 

The  necessity  of  combination  in  order  to  resist  the 
demands  of  organized  labor  is  now  generally  recognized, 
and  even  when  employers  are  not  combined  in  trusts  they 
form  associations  for  mutual  protection.  Because  of 
their  large  means,  they  are  able  to  raise  amounts  of 
money  far  greater  than  the  resources  of  the  strikers. 
The  formation  of  these  associations,  as  well  as  the  ex- 
istence of  a  large  number  of  industrial  combinations, 
has  in  recent  years  greatly  moderated  the  demands  of 
organized  labor  and  disposed  the  labor  leaders  to  adopt 
the  methods  of  conciliation  and  compromise. 

195.  Collective  bargaining  better  than  the  strike. — 
The  method  of  settling  labor  disputes  by  warfare  is 
deplorable;  it  leads  to  bad  feeling  between  employers 
and  employes  and,  as  Dr.  Warne  shows,  leads  also,  in 
many  cases,  to  violation  of  law  and  sometimes  to  blood- 
shed. Various  kinds  of  intimidation  by  strikers  to  keep 
outsiders  from  taking  their  places  are  almost  invariably 
employed.  Most  large  strikes  are  attended  with  a  con- 
siderable amount  of  riot  and  disorder,  many  lives  are 
sometimes  lost  and  much  property  destroyed.  The 
method  of  collective  bargaining  is  so  far  superior  to 
that  of  the  strike  in  the  settlement  of  disputes  between 
employer  and  employe,  that  intelligent  labor  leaders  and 
employers  are  everywhere  seeking  to  employ  it  whenever 
occasion  arises.  Compulsory  arbitration  of  labor  dis- 
putes has  been  frequently  advocated  to  force  the  contend- 

1 "  Trust  Finance,"  E.  S.  Meade,  p.  71. 


LABOR  ORGANIZATIONS  249 

ing  parties  together  in  the  interest  of  the  public,  but  it  is 
far  better  that  this  result  should  be  reached  by  voluntary- 
action  of  the  parties  interested  than  that  the  state  should 
interfere  in  settling  the  terms  of  the  wage  contract. 

196.  Other  activities  of  trades  unions. — Labor  unions 
are  active  in  improving  the  condition  of  their  members 
in  other  ways  than  in  contests  with  employers.  They 
have  been  prominent  in  advocating  labor  legislation  for 
the  reduction  of  hours  of  labor,  and  for  the  regulation 
of  child  labor  and  the  labor  of  women.  They  are 
responsible  for  laws  prohibiting  the  payment  of  wages 
in  store  orders,  the  repeal  of  laws  entitling  creditors 
to  attach  wages  for  debt,  and  many  other  laws  which 
are  calculated  to  improve  the  position  of  the  workman. 
Many  unions  maintain  insurance  funds  and  sick-benefit 
funds  which  are  of  great  assistance  to  their  members. 
Trade  unions,  when  they  have  monopolized  the  supply 
of  labor  within  an  industry  or  a  district,  restrict  the 
supply  of  labor,  usually  by  imposing  restrictions  upon 
admission  to  the  union,  or  by  limiting  the  number  of 
apprentices,  and  sometimes,  though  infrequently,  by  im- 
posing such  a  high  standard  of  excellence  as  a  condition 
of  admission  that  only  a  limited  number  of  applicants 
can  measure  up  to  the  standard. 

197.  Employers'  attitude  toward  the  closed  shop. — 
Labor  unions  are  severely  criticised  by  employers.  It 
is  claimed  that  their  efforts  to  limit  the  right  of  a  bus- 
iness man  to  employ  whom  he  wishes  and  of  laborers 
to  work  for  whom  they  please,  is  a  violation  of  the 
liberty  of  the  employer.  Thus  Mr.  Geo.  H.  Ellis,  pres- 
ident of  the  United  Typothetee  of  America  in  an  article 
on  "The  Fallacy  of  the  Closed  Shop"  in  which  none 
but  union  men  are  to  be  allowed  to  work,  says : 


250  ECONOMICS 

It  is  the  claim  only  of  him  who  wishes  to  establish  a  monopoly 
in  his  particular  line  to  the  detriment  of  the  general  public. 
Where  would  this  boasted  "land  of  the  free"  be  to-day  had  the 
theory  of  the  "closed  shop"  been  imported  by  our  forefathers? 
Was  not  the  early  settlement  of  this  country  itself  a  protest 
against  the  "closed  shop"  in  religion?  Has  the  blood  of  which 
we  have  been  so  proud  deteriorated  until  we  are  ready  to  con- 
sider our  labor,  whether  of  head  or  hands,  or  both,  merely  a 
commodity  to  be  bought  and  sold  like  the  labor  of  so  many 
oxen  ?  And  yet  the  president  of  a  prominent  skilled  labor  union 
has  said  in  my  presence  that  he  hoped  to  see  the  time  when  labor 
would  be  so  organized  that  any  employer  wanting  additional 
help  would  send  to  the  union  headquarters  for  so  many  hours 
of  labor  as  he  would  send  to  the  grocers  for  so  many  pounds  of 
sugar.  ^ 

198.  Unreasonable  demands  of  trades  unions. — The 
lawlessness  and  tyranny  which  characterize  the  admin- 
istration of  strikes,  and  the  unwillingness  or  the  inability 
of  leaders  to  restrain  their  members  from  acts  of  vio- 
lence, extending  often  to  arson  and  murder,  constitute 
the  most  serious  indictment  against  labor  organizations. 
They  are  also  denounced  because  of  the  unreasonable 
demands  which  they  frequently  make  upon  employers, 
demands  which  often  take  no  account  of  the  right  of 
the  employer  to  make  a  fair  return  on  his  investment. 
An  illustration  of  such  demands  were  the  efforts  of  the 
United  Mine  Workers  in  1908  to  secure  from  the  an- 
thracite operators  an  advance  of  wages,  a  reduction  in 
the  hours  of  labor,  a  recognition  of  the  principle  of 
the  closed  shop,  and  the  abolition  of  the  conciliation 
board,  which  was  established  by  the  strike  commission 
of  1902  and  on  which  both  operators  and  mine  workers 
had  equal  representation.     These  demands  were  made 

1  Geo.  H.  Ellis,  "The  Fallacy  of  the  Closed  Shop,"  Annals  of  the  Amer- 
ican Academy  of  Political  and  Social  Science,  May,  1906. 


L 


LABOR  ORGANIZATIONS  251 

at  a  time  when  business  was  everywhere  depressed  and 
wages  were  generally  being  reduced  in  other  occupa- 
tions, and  in  spite  of  the  fact  that  the  conciliation  board 
had  given  general  satisfaction,  and  that  conditions  in 
the  anthracite  industry  during  the  preceding  seven 
years  had  been  generally  satisfactory.  The  employers 
stood  firm  against  granting  these  demands  and  the 
union  withdrew  them. 

199.  Opposition  to  labor-saving  machinery. — The 
limitation  of  the  amount  of  work  which  members  of  the 
union  are  allowed  to  perform  is  also  denounced  as  inter- 
ference with  industrial  progress. 

The  recent  decline  of  the  British  manufactures  may  be  attrib- 
uted more  largely  to  this  mistaken  policy  than  to  any  other  sin- 
gle cause.  A  writer  in  the  London  Times  has  shown,  in  a  series 
of  articles  on  "The  Crisis  in  British  Industries"  that  the 
"canny"  system  has  reduced  the  product  of  an  English  trade 
unionist's  work  to  a  point  where  his  labor,  once  the  most  profit- 
able in  the  world,  now  frequently  nets  a  loss  to  his  employer. 
It  is  stated  that  thirty  years  ago  an  English  bricklayer  would 
lay  1,200  bricks  in  a  day,  now  the  maximum  allowed  by 
the  union  is  400.  Nor  is  this  the  only  means  adopted  to 
effect  limitation,  for  the  British  unions  have  refused  to  allow 
the  introduction  of  improved  machinery,  they  have  adopted 
stringent  rules  limiting  the  hours  and  rate  of  its  operation, 
and  when  these  measures  were  found  not  to  be  efficacious  have 
deliberately  planned  its  injury  or  destruction.  In  some  shops, 
after  the  failure  of  the  above  means,  the  disappointed  men 
have  committed  serious  crimes  by  malicious  and  persistent  inter- 
ference with  the  operation  through  the  changing  of  feeds  and 
speeds,  "racking"  by  reckless  running,  "forgetting"  to  lubri- 
cate, or  the  breaking  and  "losing"  of  small  parts.  The  defense 
of  the  limitation  of  output  on  the  part  of  certain  unions  is 
that  without  it  the  normally  average  worker  would  be  forced  to 
come  up  to  the  standard  set  by  the  stron^st  and  most  skillful, 


252  ECONOMICS 

and  in  this  way  become  worn  out  and  useless  before  his  time. 
If  this  were  proven  true,  or  even  well  substantiated,  it  would 
merit  attention  and  become  a  proper  subject  of  governmental 
control.  The  charge,  however,  is  baseless.  .  .  .  Labor 
unions  which  embrace  this  policy  of  restriction  of  output  as  a 
means  of  maintaining  the  status  of  their  trade  should  reflect 
that  it  offers  the  very  greatest  stimulus  to  the  invention  and  per- 
fection of  automatic  machines  which  dispense  more  and  more 
with  skilled  hand-workers  and  skilled  attendants.  In  the  foun- 
dry, for  example,  molding  machines  operated  by  unskilled  labor- 
ers, or  even  boys,  are  fast  displacing  skilled  molders  in  the 
lighter  class  of  work  and  their  scope  is  being  continually  en- 
larged.* 

200.  Most  promising  field  for  trade  union  develop- 
ment.— It  may,  in  conclusion,  be  questioned  if  the  trade 
union  as  now  organized  and  administered  offers  the  best 
method  of  increasing  wages.  That  the  activity  of  the 
unions  has  resulted  in  increasing  wages  in  many  cases 
cannot  be  doubted.  The  fear  of  the  strike  has  been 
far  more  successful  than  the  reality  of  the  strike  in 
forcing  employers  to  accede  to  the  demands  of  organized 
labor.  The  influence  of  organized  labor  upon  wages 
has,  however,  I  believe,  been  small  compared  with  the 
effect  of  the  increasing  productivity  of  labor  as  a  result 
of  the  larger  use  of  machinery  and  the  increase  of  the 
intelligence  of  the  working  classes.  The  most  prom- 
ising field  for  trade  unions  development  lies  in  raising 
the  standard  of  admission  into  the  union,  in  making 
sure  that  none  but  sober,  reliable  and  competent  men 
are  admitted  to  membership.  This  policy  has  been  fol- 
lowed out  with  conspicuous  success  by  such  organiza- 
tions as  the  Brotherhood  of  Locomotive  Engineers,  who 
in  effect  guarantee  the  efficiency  of  their  members,  so 

1  Alexander  E.  Outerbridge,  Jr.,  Annals  of  the  American  Academy  of 
Political  and  Social  Science,  Nov.,  1903. 


LABOR  ORGANIZATIONS  263 

that  railroad  companies  are  glad  to  employ  members 
of  the  Brotherhood  whenever  they  can  be  obtained.  If 
trade  miions  modified  their  policy  by  establishing  a 
monopoly  not  merely  of  number  but  of  quality  and 
efficiency,  as  the  railroad  brotherhoods  have  done,  it  will 
not  be  necessary  for  them  to  resort  to  the  dangerous 
methods  of  the  strike  in  order  to  enforce  their  demands. 
With  unions  so  organized  and  so  constructed,  employers 
will  be  glad  to  recognize  them  and  to  grant  the  reason- 
able requests  for  higher  wages  and  the  conditions  of 
employment. 


CHAPTER  VI 

RENT 

201.  Rent  defined. — Among  both  the  income  and 
expenditures  of  the  Reading  Coal  and  Iron  Company 
which  we  have  selected  as  the  basis  of  our  illustration 
of  distribution,  were  items  variously  called  rents  and 
royalties.  The  total  of  the  expenditures  for  royalties 
was  $458,522.89.  The  payment  on  account  of 
rentals  appears  in  the  accounts  of  almost  every  business. 
It  is  of  particular  importance,  therefore,  that  we  should 
understand  how  rent  payments  are  fixed  and  upon  what 
their  amount  depends. 

We  may  define  rent  as  the  amount  paid  to  the  owner 
for  the  use  of  some  natural  resource,  such  as  land  or 
mineral  deposits  or  water  power,  or  for  the  use  of  some 
form  of  fixed  capital,  such  as  a  wharf  or  a  building, 
or,  in  many  cases,  for  the  use  of  machinery.  The 
amount  of  rent  to  be  paid  in  each  case  is  stipulated  in 
a  contract  known  as  a  lease  by  which  the  owner  of  the 
thing  leased,  known  as  the  lessor,  agrees  to  transfer 
to  the  tenant  or  lessee  the  right  to  occupy  and  to  use 
his  property  in  a  prescribed  way,  and  for  a  definite 
time,  on  payment  by  the  lessee  of  a  stipulated  rent. 
These  contracts  are  for  various  terms.  A  dwelling 
house  is  ordinarily  rented  by  the  month  or  year,  a  farm 
for  three  or  five  years,  a  railroad  sometimes  for  999 
years.  With  mining  leases  the  term  of  the  lease  fre- 
quently extends  to  the  time  when  the  mine  shall  be 
exhausted. 

^4 


RENT  255 

202.  Forms  of  rent  payments. — The  payment  of  rent 
is  made  in  v^arious  ways.  Where  the  property  is  not 
destroyed  by  use,  the  rent  is  paid  periodically ;  monthly, 
quarterly  or  yearly.  In  the  case  of  mines,  however, 
the  rentals  of  which  are  known  as  royalties,  payment  is 
made  according  to  the  quantity  of  mineral  extracted, 
for  example,  five  or  ten  cents  per  ton.  An  illustration 
of  mineral  leases  is  furnished  by  the  transaction  by 
which  the  United  States  Steel  Corporation  acquired  con- 
trol of  the  iron  ore  lands  in  Minnesota  owned  by  the 
Great  Northern  Railroad.  In  November,  1906,  a  lease 
was  made  with  the  Great  Northern,  by  which  the  United 
States  Steel  Corporation  acquired  on  a  royalty  basis 
iron  ore  deposits  containing  an  estimated  amount 
of  500,000,000  tons  of  ore.  The  ore  mined  by 
the  lessee  was  to  be  delivered  by  the  railroad  on 
the  Lake  Superior  docks.  The  United  States  Steel 
Corporation  agreed  to  pay  80  cents  per  ton  for  the 
transportation  of  the  ore  and  85  cents  per  ton  as  royalty 
on  the  ore  extracted,  this  amount  to  increase  3.4  per  cent 
per  ton  until  1917.  The  steel  corporation  agreed  to 
mine  from  these  ore  lands  a  maximum  amount  of  750, 
000  tons  in  1907  and  thereafter  750,000  tons  additional 
for  each  succeeding  year  until  the  output  reaches  8,250, 
000  tons  in  1917.  At  this  time,  the  royalty  paid  will 
be  $1.19  per  ton,  and  the  total  rental  paid  by  the  United 
States  Steel  Corporation,  including  80  cents  per 
ton  paid  to  the  railroad  for  transportation,  will  be 
$16,417,500. 

Mineral  royalties  are  generally  fixed  on  such  a  basis 
as  to  return,  not  merely  interest  to  the  owner  of  the 
mineral  property,  but  also,  since  his  property  is  ex- 
hausted by  use,  to  replace  its  value  to  him  by  the  time 
it  is  exhausted.     In  all  leases  of  productive  property^ 


256  ECONOMICS 

such  for  example  as  street  railways,  provision  is  made 
that  the  lessee  shall  keep  the  property  in  repair  and  shall 
replace  any  part  of  it  which  may  be  worn  out.  Any 
improvements  or  additions  which  the  lessee  may  make 
to  the  lessor's  property,  in  the  absence  of  some  stipula- 
tion to  the  contrary  in  the  contract,  become  the  prop- 
erty of  the  lessor  at  the  expiration  of  the  lease.  Farm 
property  is  frequently  rented  on  shares,  the  owner 
taking  a  certain  percentage  of  the  value  of  his  crop 
as  his  rent,  usually  50  per  cent. 

203.  How  the  amount  of  rent  is  determined, — The 
amount  of  rent  is  determined  by  the  value  to  the  lessee 
of  the  productive  land  whose  use  is  conveyed  to  him 
for  a  term  of  years.  The  tenant's  or  lessee's  estimate 
of  the  value  of  the  property  which  he  leases  depends 
either  upon  the  satisfaction  which  he  and  his  family 
get  from  using  the  property,  as  in  the  case  of  a  dwell- 
ing house,  or  upon  the  profit  which  he  can  make  by 
the  employment  of  the  property  which  he  has  rented. 
The  profit  depends  upon  the  net  value  of  the  produce 
which  can  be  turned  out  by  the  use  of  the  land,  or  mine, 
or  wharf  which  is  made  the  subject  of  the  lease  con- 
tract. 

In  order  to  operate  a  farm,  an  intending  tenant  must 
have  the  wherewithal  to  equip  it.  Farm  animals,  tools, 
machinery  and  seed,  or  the  money  to  buy  these,  are 
necessary,  with  sufficient  funds  in  addition  to  support 
the  tenant  and  his  family  until  he  sells  his  crop.  This 
preliminary  expenditure  is  his  investment  in  the  farm- 
ing business.  The  amount  he  invests  is  his  capital,  and 
on  that  capital  he  expects  a  certain  rate  of  return.  In 
addition  to  this  return  on  his  money  outlay,  he  must 
invest  his  labor,  either  the  labor  of  his  hands  or  the 
labor  of  supervision,  and  for  his  labor  he  deserves  com- 


RENT  267 

pensation.  He  also  expects,  although,  as  we  shall  see, 
his  expectation  is  not  often  realized,  to  make  something 
more  than  wages  as  his  profit.  What  remains  after 
these  payments  are  met  he  will  pay  to  the  landlord  as 
rent.  As  a  class  farm  tenants  will  not  pay  as  rent  any 
more  than  the  surplus  over  the  interest  on  their  capital 
and  the  wages  of  their  labor.  If  a  landlord  tries  to 
get  more  than  this  for  his  farm,  the  farm  will  be  un- 
occupied. The  competition  of  landlords  for  tenants 
will  prevent  their  rent  from  rising  above  the  figure  men- 
tioned, and  the  competition  of  tenants  for  farms  will 
prevent  rent  from  falling  below  this  figure. 

204.  Agricultural  rents. — It  is  evident  that  the  more 
fertile  and  productive  a  given  farm  is,  the  larger  will 
be  the  return  which  the  tenant  can  make  from  its  occu- 
pancy and  the  higher  will  be  the  rent  paid.  The  primary 
causes  determining  agricultural  rent  are:  (1)  fertility 
of  the  soil  and  the  equipment  of  the  farm  with  buildings, 
drains  and  fences;  (2)  prices  of  the  products  produced 
from  the  farm;  (3)  the  location  of  the  land. 

Taking  these  up  in  order,  we  find  that  in  any  section 
where  farms  are  rented,  the  amounts  paid  for  different 
farms  will  vary  widely  according  to  their  respective 
equipment.  One  farm  has  been  carefully  cultivated  for 
many  years,  the  fertility  of  the  soil  increased  by  the 
liberal  application  of  fertilizers,  commodious  farm  build- 
ings erected,  fences  kept  in  good  repair,  and  a  large 
expenditure  made  on  ditching  and  tiling.  Another 
farm,  perhaps  adjoining  the  first,  has  been  seriously 
neglected,  its  equipment  is  poor,  its  fertility  is  low  as 
result  of  the  failure  of  the  tenant  or  owner  to  use  the 
necessary  amount  of  fertilizer.  The  natural  fertility 
of  the  first  farm  was  no  greater  at  the  outset  than  that 
of  the  second,  and  yet  the  rent  which  will  be  paid  for 

1—17 


258 


ECONOMICS 


the  first  farm  is  several  times  that  which  the  second 
will  command. 

At  any  given  time  every  farmer  knows  that  there  is  a  point 
beyond  which  it  will  not  pay  him  to  invest  labor  and  capital 
upon  each  acre  of  land.  An  investment  of  five  dollars  per  acre 
may  yield  a  return  of  twelve  bushels  of  wheat.  Possibly  an  in- 
vestment of  ten  dollars  might  have  resulted  in  a  product  of 
twenty-four  bushels.  But  the  crop  secured  from  a  single  acre 
of  land  cannot,  at  any  given  time,  be  made  to  double  indefinitely 
by  doubling  the  investment  of  labor  and  capital.  To  continue 
our  illustration,  suppose  that  fifteen  dollars  had  been  invested 
upon  the  given  acre  of  land  instead  of  ten  dollars.  Then  it  is 
probable  that  the  crop  would  have  been  increased,  but  it  is  not 
likely  that  it  would  have  amounted  to  thirty-six  bushels.  Sup- 
pose the  investment  of  fifteen  dollars  to  yield  a  crop  of  thirty 
bushels.  Then  the  results  of  investing  the  three  different 
amounts  of  capital  upon  the  given  acre  of  land  would  have 
been  as  follows : — 


Investment. 

Crop. 

Average  Yield  to  each 

Dollar    of    Labor    and 

Capital. 

$5 

$10 

$15 

12  bushels 
24  bushels 
30  bushels 

2.4  bushels 
2.4  bushels 
2.0  bushels 

It  is  evident  that,  on  the  piece  of  land  in  question,  an  invest- 
ment of  fifteen  dollars  will  secure  a  larger  yield  than  an  invest- 
ment of  ten  dollars ;  but  that  the  average  yield  secured  by  each 
dollar  of  labor  and  capital  is  less  than  it  would  have  been  had 
the  investment  been  limited  to  ten  dollars.  It  would  have  been 
better  if  the  third  five-dollar  investment  had  been  made  upon 
another  piece  of  land.  This  is  an  illustration  of  the  method 
in  which  a  law  of  diminishing  returns  operates  in  agriculture. 
As  the  investment  of  labor  and  capital  upon  an  acre  of  land 
increases,  a  point  is  finally  reached  beyond  which  an  increased 


RENT  «59 

investment  would  yield  a  larger  aggregate  but  a  smaller  pro- 
portionate return.  If  this  were  not  true,  we  should  continue  to 
raise  all  our  agricultural  produce  from  a  few  acres  of  land, 
and  would  never  have  taken  the  trouble  to  reduce  other  fields  to 
a  condition  suitable  for  cultivation. 

It  will  be  noticed  that  care  was  taken  to  say  that  the  law  of 
diminishing  returns  is  true  at  any  given  time.  In  any  season, 
when  labor  and  capital  are  invested  in  the  cultivation  of  land, 
agricultural  methods  and  skill  have  reached  a  certain  stage  of 
advancement,  and  will  not  be  materially  changed  during  that 
season.  They  are,  therefore,  relatively  fixed ;  so  that  the  econo- 
mist can  say  that,  ai  any  given  tiTne,  investments  of  labor  and 
capital  can  be  carried  only  to  a  certain  point  before  they  will 
begin  to  yield  a  diminishing  return.  On  the  other  hand,  if  we 
compare  one  season  with  another,  or  compare  one  period  of 
years  with  another,  no  law  of  diminishing  returns  may  be  found 
to  hold  true.  Scientific  agriculture  is  each  year  making  it 
possible  to  invest  more  capital  upon  land  without  encountering 
a  point  of  diminishing  returns.  Continuing  our  illustration, 
we  may  suppose  that  improved  methods  of  cultivation  are  orig- 
inated, and  that  these  improvements  make  it  possible  to  invest 
fifteen  dollars  upon  each  acre  of  land  and  to  secure  an  average 
yield  of  thirty-six  bushels  per  acre.  The  law  of  diminishing 
returns,  therefore,  is  true  only  at  a  given  time.  At  one  season 
it  is  possible  to  invest  only  ten  or  fifteen  dollars  in  cultivating 
each  acre  of  wheat  before  arriving  at  a  point  of  diminishing 
returns.  Improved  methods  of  farming  may,  however,  after  a 
period  of  years  make  it  possible  to  invest  fifteen  or  twenty  dol- 
lars on  each  acre,  and  to  secure  a  proportionately  increased 
return.  Bearing  these  considerations  in  mind,  we  can  state  the 
law  of  diminishing  returns  as  Professor  Marshall  has  formulated 
it :  "An  increase  in  the  capital  and  labor  applied  in  the  cultiva- 
tion of  land  causes  in  general  a  less  than  proportionate  increase 
in  the  amount  of  produce  raised,  unless  it  happens  to  coincide 
with  an  improvement  in  the  arts  of  agriculture." 

We  have  seen  elsewhere  that  the  population  of  civilized 
countries  is  increasing,  and  is  likely  to  increase  for  a  considerable 


260  ECONOMICS 

time  to  come.  This  fact  will  make  it  necessary  to  raise  more 
agricultural  products  as  fast  as  numbers  increase.  The  law  of 
diminishing  returns  has  sometimes  been  considered  to  imply 
that,  when  all  lands  now  vacant  shall  have  become  occupied,  men 
will  secure  increased  supplies  of  agricultural  products  only  by 
applying  more  and  more  capital  and  labor  to  land  that  will  yield 
a  constantly  diminishing  return.  Such  a  conclusion  is  wholly 
unwarranted.  From  year  to  year  the  progress  of  agriculture 
is  making  it  easier  than  ever  before  to  secure  the  products  of 
the  soil.  There  is  reason  for  thinking  that  scientific  agriculture 
is  only  in  its  infancy,  and  that  in  the  future  its  progress  will 
be  much  more  rapid  than  in  the  past. — C.  J.  Bullock,  "Introduc- 
tion to  the  Study  of  Economics,"  pp.  170-173. 

205.  Influence  of  price  on  rent. — The  importance  of 
the  second  factor,  namely,  the  price  of  the  product  in 
determining  rent,  will  readily  be  perceived.  The  rent 
is  a  certain  sum  of  money  deducted  from  the  gross 
receipts  of  the  farm.  These  gross  receipts  represent 
the  quantity  of  produce  multiplied  by  the  amount  ob- 
tained for  each  bushel  or  ton  produced.  No  matter 
how  great  the  quantity  of  produce  may  be,  if  its  price 
is  steadily  falling,  as  the  price  of  wheat  fell  with  few 
interruptions  from  1885  until  1897,  the  rent  paid  for 
the  farms  which  produce  this  wheat  must  also  decline. 
During  the  term  of  the  lease,  it  is  true,  the  tenant  has 
no  remedy  for  a  decline  in  prices,  just  as  the  landlord, 
during  the  same  term,  cannot  raise  his  rents  if  prices 
advance.  When  the  lease  expires,  however,  and  the 
question  of  a  new  lease  is  taken  up,  the  decreasing  pro- 
ductivity of  the  farm,  as  a  result  of  the  decline  in 
prices  will  usually  be  made  the  basis  of  a  successful 
claim  for  a  reduction  in  rent.  On  the  other  hand,  an 
increase  in  the  productivity  of  a  farm  due  to  rising 
prices  or  to  the  location  of  a  factory  in  the  neighbor- 


RENT  261 

hood,  which  will  make  a  market  for  fruits  and  vege- 
tables, will  enable  the  landlord  to  obtain  an  increase 
in  rent. 

206.  Location  in  relation  to  rent. — The  third  deter- 
minant of  rent,  the  location  of  the  land,  is  equally  im- 
portant with  the  other  two.  We  shall  have  present 
occasion  to  discuss  this  question  in  reference  to  city 
ground  rents,  but  the  location  of  land  is  also  important 
in  determining  agricultural  rent.  Land  in  the  neigh- 
borhood of  large  cities,  for  example,  commands  very 
large  rentals  because  it  can  be  used  for  truck  farming. 
The  importance  of  location  is,  however,  diminished  by 
the  fact  that  the  railroads  in  fixing  rates  upon  com- 
modities, endeavor  so  far  as  possible  to  equahze  dis- 
tances so  as  to  place  every  producer  upon  an  equality 
of  advantage  with  every  other  producer  of  the  same 
goods.  The  railroads,  in  other  words,  whenever  the  law 
does  not  forbid  them,  charge  the  same  rate  for  a  long 
haul  that  they  do  for  a  short  haul.  They  do  this  in 
order  to  increase  the  volume  of  traffic.  By  enabling 
a  dairy  farmer  living  one  hundred  miles  away  from 
New  York  to  ship  his  milk  into  that  city  at  the  same 
rate  as  one  residing  twenty  miles  away,  the  volume 
of  milk  traffic  passing  over  the  road  is  much  increased, 
and  the  profits  of  the  railroad  are  larger  than  they 
would  be  if  the  rate  were  increased  proportionately 
with  the  distance.  The  cost  of  transportation  has  been 
so  greatly  reduced  during  the  last  thirty  years  that 
English  grain  farmers  have  been  hard  pressed  in  com- 
peting for  their  local  markets  with  grain  grown  four 
thousand  miles  away  in  Dakota  or  Minnesota. 

207.  The  rent  of  mines. — The  rent  of  mines  is  deter- 
mined by  the  same  factors  which  fix  the  rent  of  agri- 
cultural land.     The  richness  of  the  ore  is  a  controlling 


262  ECONOMICS 

factor.  For  example,  in  the  Great  Northern  ore  lands 
above  mentioned  the  rental  payments  are  conditioned 
upon  the  ore  running  58  per  cent  in  iron  content.  For 
any  reduction  in  the  richness  of  the  ore  below  this  stand- 
ard a  proportionate  reduction  must  be  made  in  the  roy- 
alty. The  cost  of  mining,  the  price  of  the  metal 
produced  from  the  ore  and  the  distance  from  the  market 
as  bearing  upon  the  cost  of  transportation,  are  all  fac- 
tors in  fixing  the  rent  of  mines.  We  have  here  another 
illustration  of  the  principle  that  the  rental  of  a  pro- 
ductive instrument  will  be  based  upon  the  return  which 
can  be  made  by  its  use. 

208.  Ground  rents. — Ground  rents  are  determined 
on  principles  which  differ  somewhat  from  those  which 
explain  the  rent  of  agricultural  land.  Land  used  for 
building  purposes  is  valued  not  because  of  its  pro- 
ductivity, but  because  it  offers  standing  room  for  build- 
ings which  may  be  rented  for  business  purposes.  The 
rent  in  each  city,  therefore,  depends  upon  the  income 
which  can  be  obtained  from  the  building  to  be  erected 
upon  it.  This  income  varies  primarily  with  the  location 
of  the  building.  The  largest  income  can  be  obtained 
from  stores  and  office  buildings  in  the  central  sections 
of  large  cities  and  from  apartment  houses  and  hotels 
on  the  principal  streets.  In  these  sections  ground  rents 
are  highest.  Next  comes  income  from  slum  properties 
which  pay  enormous  returns  because  so  many  people 
can  be  crowded  into  a  small  space.  Next  in  order, 
comes  ground  in  the  middle  class  residential  section,  and 
finally  suburban  sections  for  suburban  residences  and 
factory  sites.  Within  the  city,  the  rents  of  a  particular 
piece  of  property  are  influenced  by  a  variety  of  con- 
siderations, nearly  all  of  which  relate  to  the  income 
to  be  derived  from  the  use  of  the  property.     When 


RENT  263 

buildings,  for  example,  are  to  be  utilized  for  retail  shops, 
the  value  of  the  location  will  depend  upon  the  number 
of  people  who  pass  the  store. 

Retail  stores  either  cluster  at  the  business  center  or  follow 
out  traffic  streets.  In  retailing  the  buyer  necessarily  seeks  the 
seller,  but  since  in  all  forms  of  trade  it  is  the  seller  who  is  anx- 
ious to  promote  business,  the  retailer  facilitates  his  possible  cus- 
tomers by  placing  his  shop  where  the  largest  number  of  them 
would  pass,  even  though  his  shop  were  not  there.  Here  he  util- 
izes his  shop  windows  and  signs  to  draw  customers  into  his  shop, 
the  two  elements  of  convenience  of  location  and  advertising  ad- 
vantage working  hand  in  hand.^ 

209.  Location  of  retail  stores. — Upon  this  subject 
Mr.  R.  M.  Hurd  writes  most  clearly: 

The  display  of  goods  is  vital  for  shops,  and  in  order  to  dis- 
play goods  shade  is  necessary ;  hence  the  side  of  the  street 
which  is  shady  during  the  part  of  the  day  in  which  women  shop 
is  normally  worth  from  20  to  40  per  cent  and  occasionally 
100  per  cent  more  than  the  sunny  side  of  the  street.  The 
west  side  of  streets  running  north  and  south,  and  the  south  side 
of  streets  running  east  and  west,  are  shady  the  greater  part  of 
the  year  from  about  12  or  1  o'clock  on,  permitting  a  display 
of  goods  without  fear  of  fading  and  rendering  the  sidewalk 
agreeable.  The  greater  part  of  the  purchasing  in  the  large 
shops  is  done  by  women  of  the  middle  classes,  whose  household 
duties  prevent  them  from  reaching  the  shops  until  after  11 
o'clock.  The  busiest  shopping  hours  are  from  11  o'clock  to 
4?  o'clock,  many  women  taking  lunch  either  in  the  department 
stores  or  in  restaurants  nearby.  The  women  of  wealth  shop 
usually  in  the  morning  between  11  and  2  o'clock,  so  that  even 
in  their  case  the  west  or  south  side  of  the  street  has  some  ad- 
vantage of  shade.  In  southern  cities  where  shade  is  even  more 
important,  the  relative  value  of  the  four  comers  of  two  inter- 

1  R.  M.  Hurd,  "  Principles  of  City  Land  Values,"  p.  75. 


J 


^64.  ECONOMICS 

secting  business  streets  is  well  defined,  the  southwest  comer 
being  the  most  valuable,  the  southeast  next,  the  northwest  next, 
and  finally  the  northeast  corner.  This  refers  only  to  retail  shop- 
ping fronts,  the  corners  having  a  different  order  of  preference  if 
desired  for  other  purposes,  such  as  hotels  or  office  buildings.  It 
is  said  that  in  such  northern  latitudes  as  those  of  St.  Petersburg 
and  Montreal  the  sunny  side  of  the  street  is  more  valuable  than 
the  shady  side,  since  it  attracts  the  travel  in  the  long  winters. 
In  New  York  some  difference  can  be  noted  in  the  tides  of  foot 
travel  according  to  the  time  of  the  year,  but  since  for  eight  or 
nine  months  of  the  year  the  climate  is  mild,  the  shops  become 
established  on  the  shady  side  of  the  street  and  whatever  travel 
in  winter  changes  to  the  sunny  side  is  not  sufficient  to  draw 
them  over.^ 

210.  Other  factors  determining  the  value  of  loca- 
tions.— The  above  illustration  shows  in  detail  the  factors 
which  influence  the  value  of  location  for  a  specified 
purpose.  Other  influences  operate  in  other  cases. 
Thus,  the  value  of  location  for  a  bank  building  depends 
on  its  situation  within  the  financial  district,  and,  in  large 
cities,  near  the  various  exchanges.  Stores  handling 
fruit,  books,  flowers,  etc.,  are  mainly  located  in  large 
cities  near  ferries  and  railroad  depots,  since  these  ar- 
ticles can  be  purchased  and  carried  home.  Restaurants, 
saloons  and  cigar  shops  are  mostly  located  along  the 
line  of  evening  travel,  especially  near  the  theatres.  The 
movement  of  ground  rents  is  influenced  by  any  cause 
which  influences  the  earning  power  of  buildings. 

The  general  principle  of  ground  rents  is  thus  cor- 
rectly stated  by  a  prominent  real  estate  operator  in 
Philadelphia:  "As  long  as  these  United  States  grow, 
and  grow  they  must,  just  so  long  will  realty  in  central 
sections  of  our  large  cities  increase  in  value."     This  is 

1  R.  M.  Hurd,  "  Principles  of  City  Land  Values,"  p.  90. 


RENT  265 

illustrated  by  the  movement  of  ground  rents  on  Man- 
liattan  Island  where  the  increase  in  population  has  raised 
rent,  and  where  the  fixed  charge  upon  income  caused 
by  excessive  rentals  which  must  be  paid  are  responsible 
for  a  serious  lowering  of  the  standard  of  living.  Tak- 
ing additional  illustrations  of  this  principle  from  JNIan- 
hattan  Island,  the  construction  of  the  subway  caused 
a  material  advance  in  rents  all  along  its  route,  and  the 
advance  was  much  greater  in  the  neighborhood  of  the 
express  stations  than  near  the  local  stations,  the  reason 
being  that  a  larger  number  of  people  would  use  the 
subway  at  the  express  stations. 

The  construction  of  street  railways,  and  especially 
the  application  of  electric  motive  power  to  urban  trans- 
portation, have  exercised  a  profound  influence  upon 
ground  rents.  Rapid  transit  has  scattered  population 
over  wide  areas,  adding  value  to  the  outlying  sections 
by  rendering  them  acceptable  for  residences,  and  to 
the  central  sections  by  increased  traffic.  In  the  dis- 
tricts lying  intermediate  between  the  suburbs  and  cen- 
tral sections,  ground  rents  have  generally  declined. 
The  new  lines  of  street  railways  in  the  suburbs  have 
greatly  increased  the  available  supply  of  land,  reducing 
the  value  of  competitive  land  and  lowering  the  value 
of  residence  property  in  the  intermediate  sections.  To 
the  low  rentals  in  the  outlying  sections,  however,  must 
be  added  the  cost  of  street  railway  transportation,  so 
that  the  reduction  is  not  so  great  as  it  would  appear. 

211.  Building  rentals. — When  we  understand  the 
principles  determining  ground  rents,  we  also  under- 
stand those  which  determine  building  rents.  The  owner 
of  the  building  is  in  the  same  position  as  the  owner  of 
the  land.  (In  fact,  in  the  United  States,  the  same  per- 
son usually  owns  both  the  building  and  land.)      He 


S66  ECONOMICS 

wishes  to  get  as  large  a  return  as  possible  on  his  in- 
vestment. On  the  other  hand,  the  tenant  has  the  choice 
of  a  numter  of  properties.  If  the  building  is  to  be 
used  for  business  purposes,  the  amount  the  tenant  will 
pay  will  depend  upon  what  he  can  earn  in  the  store  or 
that  office,  and  will  increase,  as  we  have  seen,  with 
the  earning  power  of  the  location.  Many  other  factors, 
however,  influence  building  rentals,  such  as  the  willing- 
ness of  the  landlord  to  make  repairs,  the  presence  or 
absence  of  an  elevator,  the  appearance  and  interior 
fittings  of  buildings,  the  ventilation,  the  amount  of 
light  which  the  rooms  receive,  the  convenience  of  the 
building  for  manufacturing  or  retailing — all  these  are 
factors  which  determine  the  amount  of  rent.  The  most 
important  consideration,  however,  to  which  all  these  are 
subordinate,  is  the  location  of  the  building. 

212.  Economic  rent. — In  this  discussion  we  have 
treated  rent  from  the  standpoint  of  the  landlord,  as 
a  form  of  investment  on  which  he  desires  to  get  as 
large  a  return  as  possible,  and  from  the  standpoint  of 
the  tenant,  as  a  business  or  personal  responsibility  for 
which  he  wishes  to  get  the  largest  possible  return  in 
income  or  comfort.  Economists  have  generally  dis- 
cussed the  subject  in  a  somewhat  different  way,  treating 
the  rent  of  a  piece  of  land,  for  example,  as  the  excess 
of  its  earning  power  over  the  earning  power  of  the 
poorest  piece  of  land  of  equal  extent  cultivated  for 
the  same  market.  This  they  term  "no-rent  land." 
According  to  this  view,  the  owners  of  labor  and  capital, 
since  they  would  otherwise  be  obliged  to  resort  to  the 
poorest  land  will  pay  to  the  owners  of  the  better  grades, 
the  difference  between  the  yield  of  no-rent  land  and  the 
land  which  they  rent.     We  shall  have  occasion  to  con- 


RENT  267 

sider  this  theory  in  our  discussion  of  the  single  tax  on 
land  values/ 

^**   .   . 

If  all  land  had  the  same  properties,  if  it  were  unlimited  in 

quantity,  and  uniform  in  quality,  no  charge  could  be  made  for  its 
use,  unless  where  it  possessed  peculiar  advantages  of  situation. 
It  is  only,  then,  because  land  is  not  unlimited  in  quantity  and 
uniform  in  quality,  and  because  in  the  progress  of  population, 
land  of  an  inferior  quality,  or  less  advantageously  situated,  is 
called  into  cultivation,  that  rent  is  ever  paid  for  the  use  of  it. 
When  in  the  progress  of  society,  land  of  the  second  degree  of 
fertility  is  taken  into  cultivation,  rent  immediately  commences 
on  that  of  the  first  quality,  and  the  amount  of  that  rent  will 
depend  on  the  difference  in  the  quality  of  these  two  portions  of 
land. 

When  land  of  the  third  quality  is  taken  into  cultivation,  rent 
immediately  commences  on  the  second,  and  it  is  regulated  as 
before,  by  the  difference  in  their  productive  powers.  At  the 
same  time,  the  rent  of  the  first  quality  will  rise,  for  that  must 
always  be  above  the  rent  of  the  second,  by  the  difference  between 
the  produce  which  they  yield  with  a  given  quantity  of  capital 
and  labor.  With  every  step  in  the  progress  of  population, 
which  shall  oblige  a  country  to  have  recourse  to  land  of  a  worse 
quality,  to  enable  it  to  raise  its  supply  of  food,  rent,  on  all  the 
more  fertile  land,  will  rise. 

Thus,  suppose  land — Nos.  1,  2,  3 — to  yield,  with  an  equal  em- 
ployment of  capital  and  labor,  a  net  produce  of  100,  90,  and 
80  quarters  of  corn.  In  a  new  country,  where  there  is  an  abun- 
dance of  fertile  land  compared  with  the  population,  and  where 
therefore  it  is  only  necessary  to  cultivate  No.  1,  the  whole  net 
produce  will  belong  to  the  cultivator,  and  will  be  the  profits  of 
the  stock  which  he  advances.  As  soon  as  population  had  so  far 
increased  as  to  make  it  necessary  to  cultivate  No.  2,  from  which 
ninety  quarters  only  can  be  obtained  after  supporting  the  labor- 
ers, rent  would  commence  on  No.  1 ;  for  either  there  must  be  two 

1  The  reader  will  find  the  theory  of  economic  rent  elaborated  In  John 
Stuart  Mills'  "  Political  Economy." 


268  ECONOMICS 

rates  of  profit  on  agricultural  capital,  or  ten  quarters,  or  the 
value  of  ten  quarters  must  be  withdrawn  from  the  produce  of 
No.  1,  for  some  other  purpose.  Whether  the  proprietor  of 
the  land,  or  any  other  person,  cultivated  No.  1,  these  ten  quarters 
would  equally  constitute  rent ;  for  the  cultivator  of  No.  2  would 
get  the  same  result  with  his  capital,  whether  he  cultivated  No.  1, 
paying  ten  quarters  for  rent,  or  continued  to  cultivate  No.  2, 
paying  no  rent.  In  the  same  manner  it  might  be  shown  that 
when  No.  3  is  brought  into  cultivation,  the  rent  of  No.  2  must 
be  ten  quarters,  or  the  value  of  ten  quarters,  whilst  the  rent  of 
No.  1  would  rise  to  twenty  quarters ;  for  the  cultivator  of  No.  S 
would  have  the  same  profits  whether  he  paid  twenty  quarters  for 
the  rent  of  No.  1,  ten  quarters  for  the  rent  of  No.  2,  or  cultivated 
No.  3  free  of  all  rent. — David  Ricardo,  "Principles  of  Political 
Economy,"  Chapter  II. 


CHAPTER  VII 

INTEREST 

213.  Interest  universal. — Referring  again  to  the 
statement  of  the  income  and  expenditures  of  the  Phila- 
delphia and  Reading  Coal  and  Iron  Company,  we  find 
the  sum  of  $85,455.38  set  down  as  fixed  charges  and 
taxes.  Most  of  this  sum  represents  interest.  In  the 
income  column  we  also  find  an  item  of  interest  and 
dividends.  Most  large  corporations  both  receive  and 
pay  interest,  and  the  interest  charges  of  the  majority 
absorb  the  largest  portion  of  their  earnings  after  the 
payment  of  wages.  There  are  few  business  men  who  do 
not  have  interest  to  pay  as  one  of  their  regular  dis- 
bursements. Interest  is  as  universal  a  phenomenon  of 
the  business  world  as  is  wages. 

214.  Why  interest  is  paid. — From  the  standpoint  of 
the  borrower,  the  object  of  paying  interest  is  to  secure 
control  of  present  funds  because  these  are  exchangeable 
for  capital  goods,  for  natural  agents,  and  for  labor. 
The  object  in  securing  control  of  these  productive  agents 
is  to  combine  them  in  the  productive  process  to  produce 
other  goods  for  the  market.  By  making  this  combina- 
tion, the  producer  increases  their  utility,  makes  them 
more  desirable  to  the  purchaser,  and  raises  the  price 
which  will  be  paid  for  them.  The  process  of  produc- 
tion, in  other  words,  creates  a  sum  of  value  which  ap- 
pears in  the  form  of  current  funds  received  by  the 
producer  in  the  price  of  his  product,  or  the  rate  received 

269 


370  ECONOMICS 

for  his  services,  out  of  which  the  various  payments  which 
we  have  discussed  are  made. 

215.  Interest  paid  for  money. — The  practice  of  bor- 
rowing and  lending  capital  is  in  common  use,  but  before 
the  borrower  can  get  control  of  capital,  that  is,  of  pro- 
duction goods,  he  must  first  get  control  of  a  particular 
form  of  capital — ^money  or  funds — which  he  may  ex- 
change, not  merely  for  production  goods,  but  for  labor 
and  natural  agents,  franchises  and  other  indispensable 
aids  to  production. 

Interest  has  been  defined  as  the  amount  paid  for  the 
use  of  money.  This  definition  is  not  strictly  correct. 
In  our  discussion  of  credit  we  have  seen  that  what  the 
bank  lends  or  sells  is  not  money  in  a  sense  of  gold  and 
token  money,  but  money  and  credit  both.  Money  and 
credit  may  be  included  under  the  head  of  funds.  We 
may  change  the  definition  of  interest,  therefore,  and 
say  that  it  is  the  price  for  the  use  of  funds.  This 
modified  definition  is  still  incorrect.  The  bank  does 
not  borrow  the  notes  of  its  customers,  it  buys  these 
notes.  What  it  gives  in  exchange,  moreover,  becomes 
actual  property  of  the  borrower.  In  one  celebrated 
instance  the  cashier  of  a  failed  Florida  bank  who  had 
received  money  the  day  before  the  failure  from  two  de- 
positors, giving  them  credit  at  the  time  in  their  pass 
books,  was  arrested  at  the  instance  of  the  deposi- 
tors, who  alleged  that  he  had  taken  their  money  and 
refused  on  demand  to  give  it  back  to  them.  The 
offending  cashier  was  indicted,  placed  on  trial,  and  con- 
victed in  the  lower  court,  but  the  decision  was  reversed 
on  the  ground  that  the  depositor  had  exchanged  his 
money  for  the  promise  of  the  bank  to  pay  him  money 
on  demand,  in  other  words,  for  the  credit  of  the  bank, 
and  had  therefore  lost  all  title  to  the  money. 


INTEREST  5871 

216.  Interest  and  discount  identical. — The  business 
of  banking  is,  therefore,  a  business  of  buying  and  sell- 
ing. We  shall,  however,  continue  to  use  the  terms 
borrowing  and  lending  now  that  we  understand  exactly; 
what  they  mean.  The  customer  of  the  bank  buys  money 
or  funds,  and  he  pays  for  these  funds  with  his  promise 
to  pay  money  at  a  future  time.  He  buys  $985,  deliv- 
ered to  him  immediately  over  the  bank's  counter,  if  he 
desires  it,  and  he  gives  in  exchange  a  promise  to  pay 
$1,000  three  months  from  date.  The  difference  be- 
tween the  money  which  he  receives  and  the  amount 
which  he  promises  to  pay  is  interest.  Interest  may  be 
defined,  therefore,  as  the  discount  at  which  promises  to 
pay  money  in  the  future  can  be  exchanged  for  present 
funds.  This  definition  will  be  found  to  explain  not  only 
bank  loans,  where  this  truth  is  made  apparent  in  the 
term  discount,  but  also  those  cases  where  the  full  amount 
borrowed  is  delivered  to  the  borrower  at  the  time  the 
loan  is  made. 

Take  the  case  of  a  loan  made  on  mortgage  security, 
for  example.  Here  a  farmer  borrows  $5,000  at  6  per 
cent  for  five  years  from  January  1,  1913,  and  he 
receives  $5,000  down  in  cash.  In  return,  he  gives  his 
promise  to  pay  $5,000  in  1918.  In  this  case,  as  in  the 
case  of  bank  discount,  $5,000  of  present  funds  are  pur- 
chased with  the  promise  to  pay  back  the  sum  of  $6,500 
at  various  dates  in  the  future. 

217.  Forms  of  security  for  loans. — In  order  to  insure 
the  keeping  of  these  promises  by  the  debtor,  the  creditor 
usually  demands  that  the  borrower  enter  into  a  supple- 
mentaiy  contract  of  security.  It  is  true  that  if  the  obli- 
gation is  not  met  when  due,  the  creditor  can  sue  the 
debtor,  and  can  obtain  judgment  against  him,  have  the 
debtor's  property  seized  by  order  of  the  court,  and  sold 


«72  ECONOMICS 

up  to  the  amount  necessary  to  satisfy  his  claim.  An 
additional  contract  of  security  is,  however,  usually 
demanded. 

Security  contracts  have  been  defined  as  agreements 
by  which  the  borrower  obtains  a  favorable  judgment 
as  to  his  willingness  and  ability  to  pay,  which  favorable 
judgment,  in  the  absence  of  such  a  supplementary  con- 
tract, would  be  lacking.  These  contracts  of  security 
are  in  various  forms:  first,  endorsement  by  a  third 
party  who  writes  his  name  on  the  back  of  the  note  and 
thereby  promises  to  pay  the  note  if  the  borrower  fails  to 
pay  it  when  due.  In  order  to  hold  the  endorser,  it  is 
necessary  for  the  lender,  immediately  after  the  time  of 
payment  expires,  to  make  public  declaration  of  this  fact 
through  a  notary  public  and  to  notify  the  endorser. 

218.  The  mortgage. — The  second  form  of  security  is 
the  mortgage.  A  mortgage  is  an  instrument  by  which 
certain  property  is  conveyed  in  trust  to  the  creditor  or 
his  representative.  In  the  case  of  the  pledge  of  real 
property,  such  as  a  house  or  a  railroad  as  security  for  a 
loan,  the  property  remains  in  the  possession  of  the 
debtor,  and  the  trust  does  not  become  active  unless  in- 
terest or  principal  is  not  paid  when  due.  The  nature 
of  this  grant  appears  in  the  following  extract  from  a 
mortgage  issued  by  a  steamship  company  to  secure  an 
issue  of  bonds. 

That  for  the  purpose  of  securing  the  payment  of  the  prin- 
cipal and  interest  of  each  and  all  of  said  bonds  at  any  time  out- 
standing under  the  authority  aforesaid,  .  .  .  the  said 
transportation  company  has  .  .  .  conveyed,  confirmed,  as- 
signed, transferred  and  set  over  .  .  .  unto  said  trustee, 
their  successor  or  successors  and  assigns,  forever,  all  the  fol- 
lowing described  real  and  personal  property,  estates,  rights,  privi- 
leges and  appurtenances.     .     .     .     To  have  and  to  hold,  all  and 


INTEREST  S73 

singular  said  property,  real,  personal  and  mixed,  together  with 
the  appurtenances  thereof,  unto  the  said  Trustee  .  .  .  but 
IN  TRUST  nevertheless,  for  the  equal  and  proportionate  benefit 
and  security  of  all  present  and  future  holders  of  bonds  and  in- 
terest coupons  issued  under  and  secured  by  this  indenture,  and 
for  the  enforcement  of  the  payment  of  said  bonds  and  interest 
when  payable  according  to  the  tenor,  purpose  and  effect  thereof. 

The  advantage  of  this  conveyance  to  the  creditor  is 
that  the  property  named  in  the  mortgage  is  set  apart  as 
the  security  for  his  obligation,  and  no  lien  or  en- 
cumbrance can  be  placed  upon  this  property  which  will 
rank  ahead  of  his  own.  In  case  interest  or  principal  is 
not  paid,  therefore,  the  creditor  has  certain  property 
which  is  set  aside  for  his  protection  which  can  be  levied 
upon  after  he  has  proven  his  claim  in  court. 

219.  Collateral  security. — Collateral  security  is  also 
frequently  demanded.  In  this  form  of  security  con- 
tract, some  kind  of  property,  usually  shares  of  stock  or 
corporation  notes,  or  warehouse  "receipts"  certifying 
to  the  ownership  of  wheat  or  cotton  or  coffee,  are  put  in 
the  actual  possession  of  the  creditor  under  an  instrument 
authorizing  him,  in  case  the  interest  or  principal  is  not 
paid,  to  sell  the  property  at  public  or  private  sale  without 
giving  notice  to  the  debtor,  to  pay  the  debt  out  of  the 
proceeds  of  the  sale,  and  to  return  any  balance  to  the 
debtor.  In  collateral  and  mortgage  contracts  of 
security,  the  transaction  reduced  to  its  lowest  terms  is  as 
follows :  The  debtor  appoints  the  creditor  or  his  repre- 
sentative, his  (the  debtor's)  trustee,  and  authorizes  the 
trustee  to  discharge  his  obligation  in  case  the  debtor  can- 
not pay.  To  enable  the  trustee  to  carry  out  the  terms 
of  his  trust,  certain  property  is  conveyed  to  him  which 
he  is  authorized  to  sell,  pay  the  debt  and  return  the 
balance  to  the  debtor. 

1—18 


«74)  ECONOMICS 

220.  Classes  of  loans. — The  discount  on  the  sale  of 
promises  to  pay  money  in  the  future,  which  we  term 
interest,  is  expressed  in  the  form  of  a  certain  rate  per 
cent  on  the  sum  named  in  the  contract  to  pay  money. 
This  may  vary  from  40  or  50  per  cent  a  year  to  1^ 
and  2  per  cent  according  to  conditions.  What  now  are 
these  conditions?  Upon  what  does  the  rate  of  interest 
depend?  In  order  to  answer  this  question,  we  must 
first  distinguish  between  classes  of  loans.  Loans  may 
be  divided  into  two  general  classes,  short  time  loans  and 
loans  for  long  periods.  Under  short  time  loans  we  have, 
first,  call  loans,  where  the  borrower  promises  to  pay 
whenever  requested  by  the  lender;  and,  second,  loans 
for  periods  less  than  a  year — three,  four  and  six  months. 
Call  loans  are  usually  made  in  connection  with  the  pur- 
chase of  stocks  and  bonds.  Since  we  do  not  intend  to 
go  into  this  subject  in  detail,  it  need  detain  us  no 
longer  than  to  state  that  the  low  rate  of  interest  usually 
charged  on  these  loans,  is  explained  by  the  fact  that 
they  are  usually  secured  by  ample  collateral,  and  that 
they  are  payable  on  demand,  so  that  banks  may  invest 
their  surplus  funds  in  this  class  of  loans  with  the  cer- 
tainty that  should  opportunity  arise  for  making  loans 
at  higher  rates  of  interest,  the  funds  loaned  on  call  will 
be  immediately  available. 

221.  Short  time  commercial  loans. — Short  time  loans 
for  periods  of  two  to  three  and  four  months,  are  of 
great  importance  in  the  conduct  of  business.  Most  of 
these  notes  are  offered  to  the  banks  by  men  engaged  in 
active  business  who  have  money  coming  to  them  in  the 
future  on  account  of  goods  sold,  but  who  have  present 
expenses  to  meet  for  labor,  materials,  interest,  taxes,  etc. 
In  order  to  obtain  funds  for  these  immediate  needs, 
they  exchange  their  promises  to  pay  money  in  the  future 


INTEREST  215 

for  the  right  to  draw  immediately  against  the  bank,  and 
they  arrange  that  the  promissory  notes  which  they  sell 
to  the  bank  shall  mature  after  money  is  due  to  be  paid 
to  them  to  an  amount  equal  to  the  face  of  the  notes. 
This  transaction  is  called  borrowing  in  anticipation  of 
accounts  and  bills  receivable. 

These  loans  are  made  in  two  forms,  either  the  note 
of  the  borrower  is  purchased  or  the  bank  buys  the 
claims  against  the  borrower's  own  debtors  expressed  in 
the  form  of  drafts  or  promissory  notes.  In  the  second 
case  the  borrower  guarantees  that  the  promises  to  pay 
which  have  been  executed  to  him  and  which  he  has  sold  to 
the  bank,  will  be  promptly  paid  to  the  bank  when  due. 
In  the  United  States  it  is  customary  for  merchants  and 
manufacturers  to  borrow  on  their  own  notes  to  obtain 
the  funds  to  carry  on  their  business.  In  England,  on 
the  other  hand,  it  is  customary,  as  it  formerly  was  in  this 
country,  for  the  seller  to  exact  either  a  promissory  note 
or  an  accepted  draft  from  the  buyer,  which  can  be  sold 
to  the  bank  with  the  guarantee  of  the  seller.  The 
English  system,  while  not  popular  in  the  United  States, 
is  generally  considered  to  be  a  more  conservative 
method  of  doing  business.  In  England  banks,  as  a  rule, 
purchase  accepted  drafts,  to  pay  which  two  responsible 
persons  are  obligated  who  have  each  received  value  on 
account  of  the  transactions  in  which  the  notes  originate. 

222.  Long  time  loans. — Long  time  loans  may  be 
divided  into  three  classes;  first,  loans  on  real  estate 
security;  second,  corporate  bonds;  and  third,  public 
bonds.  There  are  other  classes  of  long  time  bonds,  but 
they  are  of  minor  importance.  The  purpose  of  loans 
on  real  estate  security  is  usually  the  improvement  or  ex- 
tension of  farm  or  city  property  or  the  enlargement  of 
the  borrower's  business.     Corporation  borrowing  is  ef- 


276  ECONOMICS 

fected  by  the  sale  of  similar  notes  usually  issued  in 
denominations  of  $500  and  $1,000  to  an  aggregate 
amount  in  some  cases  reaching  from  $50,000,000  to 
$100,000,000.  These  notes  are  called  bonds.  They  are 
secured  by  a  mortgage  on  the  property  of  the  corpora- 
tion, either  its  physical  property  or  other  stocks  and  bonds 
which  it  owns.  This  property  is  conveyed  in  trust  to  the 
trustee,  usually  a  trust  company,  who  acts  in  behalf  of  the 
creditors.  We  have  already  had  an  illustration  of  such 
a  conveyance. 

Bonds  bear  interest  at  a  certain  rate  per  cent  on  the 
principal,  which  is  paid  to  the  holder  in  quarterly  or 
semi-annual  installments.  The  bonds  are  sold  to  in- 
vestors in  various  amounts,  and  in  this  way  a  large 
amount  of  money  can  be  placed  at  the  service  of  a  cor- 
poration. Bonds  are  usually  issued  by  corporations  for 
great  works  of  permanent  improvement,  such  as  the 
construction  of  a  railroad  or  the  purchase  of  cars  and 
locomotives,  or  the  enlargement  of  a  terminal.  If  the 
judgment  of  the  borrowing  corporation  has  been  cor- 
rect, the  earnings  of  the  company,  as  a  result  of  the 
investment  of  the  proceeds  of  these  bonds,  will  be  in- 
creased sufficiently  to  pay  the  interest,  and,  if  repayment 
of  the  principal  is  desired,  to  accumulate  a  sum  sufficient 
to  pay  the  loan  at  maturity.  The  corporation  also  ex- 
pects to  show  a  profit  over  the  amount  of  the  interest 
and  the  sum  set  aside  to  repay  the  principal. 

The  term  of  these  corporate  bonds  varies  with  the 
nature  of  the  business  in  which  the  money  is  to  be 
invested.  Where  the  borrowing  company  owns  a  large 
amount  of  real  property,  or  where  it  has  a  monopoly 
of  a  certain  business — as,  for  example,  a  street  railway 
or  a  gas  company — or  when  its  earnings  have  been  large 
and  stable  for  a  number  of  years,  long  term  bonds, 


INTEREST  277 

running  sometimes  one  hundred  years,  can  be  readily 
sold.  In  the  case  of  a  manufacturing  company,  how- 
ever, such  as  a  paper  company  or  meat  packing  com--^ 
pany,  where  the  position  of  the  business  is  not  very  well 
assured,  the  assets  of  comparatively  small  value,  and  the 
earnings  irregular,  the  term  of  bonds  is  much  shorter. 
Bonds  of  such  corporations  do  not  extend  more  than  ten 
or  twenty  years,  since  the  lender  is  unwilling  to  risk  his 
money  for  a  longer  period. 

223.  Public  bonds. — Public  bonds  are  the  obligations 
of  nations,  states,  counties,  townships  and  municipalities. 
These  bonds  are  issued  to  obtain  funds  for  war,  public 
improvements  or  purposes  of  a  similar  nature.  The 
security  of  national  and  state  bonds  is  the  faith  and 
credit  of  the  issuing  government;  in  case  of  default  in 
the  payment  of  principal  or  interest,  the  creditor  cannot 
sue  except  with  the  consent  of  the  respective  govern- 
ment. In  case  of  county,  township  and  municipal 
bonds,  however,  the  creditor,  in  case  of  default,  has 
always  the  right  to  sue.  These  public  corporations  are 
regularly  organized  by  the  state,  and  the  state  holds 
them  to  rigid  account  for  their  obligations.  No  prop- 
erty, even  in  these  cases,  is  specifically  pledged  to  secure 
the  loans. 

224.  The  investor. — ^Long  term  obligations  are  pur- 
chased by  a  class  of  lenders  known  as  investors.  The 
investor  is  either  an  individual,  a  firm  or  corporation. 
The  object  of  the  investor  in  lending  money  for  a  long 
period  is  to  receive  an  assured  and  stable  income  during 
that  period,  and  if  he  can  be  sure  of  his  income,  he  does 
not  care  for  the  repayment  of  the  principal.  In  case 
he  requires,  for  other  purposes,  the  money  which  he  has 
expended  in  the  purchase  of  a  long  term  obligation,  he 
can,  without  difficulty,  find  some  other  investor  who  will 
purchase  this  obligation  from  him  and  can  thus  obtain 


278  ECONOMICS 

a  return  of  the  money  invested.  The  largest  investors 
in  the  United  States  are  the  savings  banks  and  insurance 
companies.  These  receive  the  savings  of  millions  of 
people,  giving  in  return  either  a  small  rate  of  interest 
with  a  promise  to  return  the  principal,  or,  in  the  case 
of  insurance  companies,  giving  a  guarantee  that,  in  con- 
sideration of  certain  regular  payments  by  the  holder  of 
the  guarantee,  the  company  will  pay  him,  his  heirs  or 
assigns  a  stipulated  sum  in  the  event  of  death,  fire,  ship- 
wreck, theft  or  other  contingencies.  Both  savings 
banks  and  insurance  companies  lend  most  of  the  money 
placed  in  their  hands  to  corporations  and  municipalities. 
Most  of  their  purchases  are  of  bonds.  They  also  invest 
largely  in  real  estate  mortgages.  These  purchases  are 
made  at  prices  which  will  return  more  than  the  amount 
which  they  must  pay,  either  as  interest  or  as  a  return  of 
principal  or  in  satisfaction  of  loans  resulting  from  in- 
surance risks. 

225.  Rates  of  interest  on  loans. — Corresponding  to 
these  various  loans,  we  have  a  variety  of  rates  of  interest. 
Call  loans  in  New  York,  for  example,  secured  by 
marketable  stocks  or  bonds,  have  been  made  at  as  low  a 
rate  as  1  per  cent;  short  time  mercantile  loans  with  an 
endorser  usually  bring  from  3%  to  5  per  cent;  loans 
on  the  security  of  farm  mortgages  5  and  6  per  cent ;  the 
best  class  of  municipal  bonds  3%  ^^  ^  P^^  ^^^^ »  railroad 
bonds  3I/2  to  4%  per  cent ;  bonds  of  manufacturing  and 
mining  companies  5  to  6  per  cent;  loans  on  improved 
city  real  estate  4  to  5  per  cent;  and  government  bonds 
1%  to  2%  per  cent. 

The  rate  of  interest  paid  by  the  corporation  on  notes 
sold  to  the  investor  depends,  not  on  the  rate  named  in 
the  instrimient,  but  on  the  price  obtained.  For  ex- 
ample, 4  per  cent  bonds  may  be  so  desirable,  in  the 


INTEREST  279 

opinion  of  the  investor,  as  to  command  a  price  of  110, 
in  which  case  the  corporation  would  be  borrowing  at  less 
than  4  per  cent  because,  while  it  gave  to  the  bond  buyer, 
who  is  the  lender,  a  promise  to  pay  him  $40  a  year  for 
twenty  years  and  $1,000,  the  amount  of  the  original 
loan,  at  the  end  of  that  period,  it  receives  $1,100  for  the 
promise.  The  investor  is  buying  an  income  of  $40  a 
year  when  he  buys  a  4  per  cent  bond.  According  to  his 
opinion  of  the  security  of  the  income,  and  the  certainty 
that  his  principal  will  be  returned  to  him,  will  be  the 
price  which  he  will  pay  for  this  income.  He  may  pay 
$1,100  for  $40  a  year,  or  he  may  not  pay  more  than  $800 
for  the  same  income,  plus  the  right  to  receive  back  the 
amount  of  his  loan  at  the  date  of  maturity. 

226.  Causes  determining  the  rate  of  interest, — Upon 
what  does  the  present  price  of  promises  to  pay  money 
in  the  future  depend?  It  depends  upon  the  supply 
of  promises  to  pay  money  of  a  given  class,  compared 
with  the  demand  for  bonds  or  notes  of  that  class.  All 
funds  in  the  present  are  of  equal  value  to  the  bor- 
rower, but  all  promises  to  pay  money  at  a  future  time 
are  not  equally  esteemed  by  the  lender.  One  thousand 
dollars  is  the  same  to  the  farmer  in  Western  Kansas  who 
oif ers  a  mortgage  on  his  semi-arid  land,  as  it  is  to  the 
government  of  the  United  States,  which  offers  to  the 
lender  the  best  security  in  the  world,  but  the  farmer's 
promise  to  pay  is  not  esteemed  as  highly  as  that  of  the 
government. 

The  various  classes  of  promises  to  pay  money  at  a 
future  time  may  be  arranged  in  a  descending  series 
according  to  their  reputation  and  esteem  among  in- 
vestors. At  the  top  stand  government  bonds,  which 
bear  the  lowest  rates  of  interest;  then  come  call  loans, 
then  short  time  commercial  loans,  following  in  order 


280  ECONOMICS 

come  municipal  bonds,  railroad  bonds,  bonds  of  public 
service  corporations,  such  as  gas  and  electric  lighting 
companies;  farm  mortgages,  industrial  bonds  and 
mining  bonds.  This  list  includes  most  of  the  loans  with 
which  business  men  are  familiar.  As  we  come  down  in 
the  scale,  the  demand  for  loans  weakens.  A  smaller 
amount  of  money  is  offered  for  these  bonds.  In  order 
to  sell  them,  their  price  must  be  fixed  at  a  moderate 
figure  and  their  rates  of  interest  raised.  The  lower  the 
price  at  which  the  promise  to  pay  a  given  sum  of 
money  in  the  future  can  be  sold,  the  higher  is  the  rate  of 
interest  on  the  loan  which  the  sale  of  a  promise  repre- 
sents. The  rate  of  interest  is,  therefore,  fixed  in  the 
same  way  as  are  the  prices  of  commodities,  by  a  com- 
parison of  the  supply  with  the  demand.  As  the  supply 
of  a  given  class  of  loans  increases,  assuming  that  the 
demand  remains  stationary,  the  rate  of  interest  will  rise. 
On  the  other  hand,  the  supply  of  United  States  govern- 
ment bonds  is  almost  stationary  and  the  demand  has 
been  increasing  for  a  number  of  years;  as  a  result  the 
rate  of  interest  on  government  bonds  has  been  decreas- 
ing for  many  years.    Says  Professor  Bullock: 

The  payment  of  interest  for  a  loan  of  capital  is  not  explained 
by  simply  showing  that  capital  serves  to  increase  production, 
to  Improve  the  quality  of  the  product,  and  to  secure  products 
that  would  be  unattainable  otherwise.  If  men  would  be  willing, 
without  receiving  Interest,  to  accumulate  enough  capital  to  carry 
on  the  business  of  the  world,  then  no  one  could  secure  interest. 
But  this  Is  something  that  cannot  be  expected.  If  a  person 
has  $1,000,  he  can  expend  it  for  consumers'  goods  that  are 
available  Immediately.  If  he  invests  It  In  capital,  he  can  secure 
a  return  only  after  some  time  has  elapsed.  When  he  Invests 
$1,000  In  productive  capital,  he  converts  a  present  available 
income  Into  such  a  form  that  It  Is  available  only  in  the  future. 


L 


INTEREST  281 

Now,  persons  will  not  exchange  a  present  income  of  $1,000 
for  a  future  income  of  only  $1,000.  This  is  for  two  principal 
reasons;  First,  the  future  is  always  more  or  less  uncertain, 
and  "a  bird  in  the  hand  is  worth  two  in  the  bush."  Second,  even 
when  the  uncertainty  and  risk  of  the  future  are  reduced  to  a 
minimum,  most  persons  underestimate  or  undervalue  future 
pleasures  and  pains.  But  many  people  are  willing  to  invest 
$1,000  of  income  in  capital  so  that  it  will  be  unavailable  for  a 
year,  in  return  for  $1,050  at  the  end  of  that  period.  The  $50 
premium  would  be  interest  in  this  case.  It  would  be  a  premium 
added  to  the  principal  of  the  loan,  available  only  at  the  end  of 
the  year,  in  order  to  make  it  equivalent  to  a  present  income  of 
$1,000.  Interest  is  paid,  therefore,  as  a  premium  to  equalize 
future  goods  or  future  income  with  present  goods  or  income,  in 
the  estimation  of  possible  investors.  Capital  formation  implies 
a  willingness  to  invest  present  income  in  producers'  goods  that 
are  available  only  in  the  future.  Interest  is  the  inducement 
necessary  to  insure  the  formation  of  enough  capital  to  meet  the 
needs  of  business. 

Capital  may  be  furnished  by  three  classes  of  persons.  First, 
it  may  come  from  rich  persons  with  large  incomes,  who  can 
easily  save  large  amounts  of  income  and  invest  them  in  capital. 
Second,  it  may  be  supplied  by  persons  of  moderate  means  who 
wish  to  provide  for  the  future,  and  would  do  so  even  at  very 
low  rates  of  interest.  Both  of  these  classes  of  investors  do  not 
require  large  premiums  in  order  to  induce  them  to  convert  part 
of  their  present  incomes  into  capital.  In  the  tJiird  place,  we 
have  marginal  investors,  who  will  furnish  more  or  less  capital 
according  to  the  inducements  offered  for  its  investment.  These 
may  be  wealthy  persons,  or  may  be  people  of  moderate  means, 
who  would  save  and  invest  a  portion  of  their  incomes  even  at  low 
rates  of  interest.  But  they  will  save  more,  and  furnish  more 
capital,  if  the  premium  offered  for  investments  is  high. 

The  demand  for  productive  capital  comes  from  all  the  indus- 
tries that  are  needed  to  meet  the  wants  of  the  society.  The 
demand  will  be  large  in  proportion  to  the  energy  and  enterprise 
of  the  population  in  all  branches  of  economic  activity.     In  the 


282  ECONOMICS 

second  place,  the  demand  will  be  stimulated  by  the  natural  oppor- 
tunities offered  for  favorable  investments.  Both  of  these  causes 
have  made  the  demand  for  capital  very  active  in  the  United 
States. 

The  rate  of  interest  is  really  the  rate  of  annual  income  that 
will  equalize  future  income  with  present  in  the  minds  of  those 
persons  who  furnish  the  marginal  portion  of  the  supply  of  capi- 
tal needed  to  meet  the  demands  of  the  business  of  a  society. 
In  other  words,  we  have  merely  another  case  of  the  equalization 
of  the  supply  and  the  demand  through  changes  in  price — in  this 
case  "price"  meaning  the  premium  offered  for  future  goods 
or  income.  Prices  of  commodities  must  be  high  enough  to  en- 
able the  marginal  investors  of  capital  to  secure  a  premium,  a 
rate  of  interest,  that  will  induce  them  to  furnish  the  amount  of 
capital  required. 

227.  Bases  of  classification  of  loans. — There  are 
several  causes  which  explain  these  differences  in  the 
desirability  of  various  classes  of  loans.  First  and  most 
important  is  the  difference  in  security.  Double-name 
paper  is  better  than  single-name  paper  because  of  the 
double  responsibility  which  the  endorsement  gives. 
Double-name  paper  secured  by  collateral  is  still  better 
because  of  the  additional  property  securing  it.  The 
bonds  of  a  large  city  are  usually  much  safer  than  the 
bonds  of  a  small  town.  The  bonds  of  a  railroad  com- 
pany which  earns  $5,000,000  more  than  the  amount  re- 
quired to  pay  its  interest  charges  are  more  desirable 
than  the  bonds  of  a  company  that  only  earns  $500,000 
above  its  interest  charges.  A  mortgage  on  an  Okla- 
homa farm  is  usually  regarded  as  less  secure  than  an 
Iowa  farm  mortgage. 

The  second  reason  for  valuing  some  loans  higher  than 
others  is  the  different  esteem  attaching  to  different 
loans   altogether  aside  from  the  security  which  they 


INTEREST  ftSS 

carry.  Government  bonds,  therefore,  appeal  to  many- 
persons  who  have  no  confidence  in  raih'oad  first 
mortgage  bonds,  although  the  bonds  of  some  rail- 
road companies  are  fully  as  secure  as  the  bonds 
of  the  United  States  government.  In  fact,  for  a 
considerable  period  of  our  history,  the  bonds  of  the 
Pennsylvania  Railroad  Company  were  more  secure — 
since  they  were  payable  in  gold — than  the  bonds  of  the 
United  States  government,  which  were  payable  in 
dollars,  the  definition  of  the  dollar  until  1900  being 
somewhat  uncertain.  Railroad  bonds,  in  turn,  are 
familiar  to  more  people  than  are  mining  bonds  and  the 
percentage  of  loss  in  railroad  investments  is  very  much 
less  than  in  mining  investments.  Railroad  bonds  are, 
therefore,  in  the  greater  demand.  Notes  secured  by 
real  estate  mortgages  are  popular  among  the  ultra  con- 
servative investors  who  wish  to  have  security  for  their 
money  any  time  they  desire. 

In  general,  however,  it  will  be  found  that  the  investor 
has  established  the  correct  order  of  security  in  the  rank 
to  which  he  assigns  different  bonds.  The  bonds  of 
some  governments,  such  as  Venezuela  or  Colombia,  it  is 
true,  may  be  less  secure  than  the  bonds  of  some  mining 
companies,  such  as  the  Reading  Coal  and  Iron  Company, 
but,  on  the  average,  the  percentage  of  loss  which  the 
investor  has  sustained  by  purchasing  government  bonds 
is  very  small  compared  with  the  losses  incurred  by  those 
who  have  purchased  the  bonds  of  mining  companies. 
The  gradation  of  investments  upon  which  depends  the 
amount  of  money  seeking  investment  in  each  class,  is 
based  therefore  directly  upon  the  difference  in  security 
as  between  the  different  classes. 

228.  Changes  in  interest  rates. — ^We  have  finally  to 
discuss  the  differences  in  the  rates  of  interest  on  given 


284  ECONOMICS 

loans  at  different  times.  This  question  can  best  be 
considered  in  relation  to  bank  loans.  When  the  country 
is  prosperous  and  business  men  generally  are  making 
money,  the  demand  for  loan  funds  is  strong  and  the 
supply  of  promises  to  pay  money  is  large.  At  such 
periods,  when  prices  are  rising,  every  one  is  anxious 
to  get  hold  of  funds  in  order  to  purchase  production 
goods  and  hire  labor  and  engage  in  or  enlarge  produc- 
tion. The  purchaser  of  pig  iron,  for  example,  sees  that 
the  price  of  his  product  is  advancing.  He  knows  that 
if  he  can  buy  material  and  hire  labor  he  can  buy  the 
iron  at  $14  per  ton  and  sell  it  for  $22  to  $25  per  ton. 
Most  producers,  when  prices  are  rising,  are  in  the  same 
position.  Merchants  see  a  chance  in  the  general  pros- 
perity of  the  wage  earners  and  the  farmers  to  enlarge 
their  sales  if  they  can  increase  their  stock.  Every 
business  man  endeavors  at  such  a  time,  therefore,  to 
procure  ready  money  by  selling  his  promise  to  pay 
money  in  the  future.  The  more  anxious  he  is  to  obtain 
money  down,  the  larger  the  profit  he  expects  from  the 
employment  of  the  fimds,  the  lower  is  the  price  at 
which  he  will  sell  his  promise  to  pay;  in  other  words, 
the  higher  is  the  rate  of  interest  which  he  will  pay  the 
lender.  At  such  periods,  the  banks  rapidly  increase 
their  loans  and  their  deposits,  and  their  profits  are  very 
large. 

We  have  seen  that  the  necessity  of  keeping  a  definite 
percentage  or  cash  reserve  fixes  a  limit  beyond  which, 
in  the  issue  of  their  promises  to  pay,  banks  may  not  go. 
The  result  is  that  within  a  short  time  after  prices  have 
begun  to  advance,  the  demand  for  loan  funds  increases 
more  rapidly  than  the  supply,  and  the  rates  of  interest 
rise.  The  further  this  movement  is  continued,  the  more 
anxious  are  borrowers  to  obtain  ready  money,  and  the 


INTEREST  285 

smaller  is  the  margin  within  which  the  banks  can  expand 
their  credit  to  sell  to  borrowers. 

229.  Limitations  to  the  expansion  of  hank  credit. — 
This  condition  of  rising  prices  and  rising  interest  rates 
after  a  longer  or  shorter  period,  and  after  many  fluctua- 
tions of  prices  and  interest  rates,  is  finally  reversed,  and 
prices  and  interest  begin  to  fall.  The  banks  finally 
reach  a  point  where  they  cannot  extend  their  credit 
further.  Business  men  borrow  for  two  reasons;  either 
to  buy  or  to  keep  from  selling.  When,  therefore,  the 
banks  refuse  to  extend  additional  credit  because  they 
cannot  otherwise  keep  within  the  provisions  of  the  law 
which  requires  them  to  maintain  at  all  times  a  certain 
percentage  of  cash  reserve  against  their  demand  liabili- 
ties, a  certain  amount  of  the  demand  for  commodities 
is  withdrawn,  those  business  men  who  have  been  carry- 
ing large  stocks  of  goods  or  securities  on  borrowed 
money  in  anticipation  of  a  rise  in  price,  are  required  to 
repay  some  of  their  loans.  The  demand  for  conmiodi- 
ties  and  securities  as  a  result  of  the  curtailment  of  bank 
credit  is,  therefore,  decreased,  and  the  supply  of  com- 
modities and  securities  enlarged.  As  a  result,  prices 
fall.  Falling  prices  reduce  profits ;  business  men  curtail 
their  operations,  and  in  time  the  rate  of  interest,  which 
was  high  during  a  period  of  advancing  prices,  falls  to 
low  figures  and  remains  on  a  low  level  as  a  result  of 
the  decreased  demand  for  loan  funds,  until  prosperity 
returns  and  prices  again  move  upward. 

We  may  say,  therefore,  that  the  rate  of  interest  on 
bank  loans  moves  with  the  prices  of  commodities  and 
securities,  rising  as  they  rise  and  falling  as  they  fall. 
The  same  explanation  applies  to  fluctuations  in  the 
rates  of  interest  on  other  classes  of  loans.  These  are 
given  in  detail  in  the  volume  on  Investment  and 
Speculation. 


CHAPTER  VIII 

PROFITS 

230. — How  profits  are  calculated. — The  final  share  in 
distribution  is  called  profits.  The  operating  profits  of 
any  business  may  be  calculated  by  the  following  for- 
mula: 

(Gross  receipts) — [(wages  and  cost  of  materials) -{-(depre- 
ciation +  repairs  -\-  interest  -|-  taxes)]  =  profits. 

In  the  case  that  we  have  under  observation,  the  Phila- 
delphia and  Reading  Coal  and  Iron  Company,  out  of 
$35,733,652.85  resulting  from  sales  and  other  sources  of 
income  the  profits  amounted  to  only  $171,575.65. 

It  is  evident  that  the  profits  of  business  are  much 
smaller  than  is  commonly  supposed.  After  a  manu- 
facturer pays  his  wages  and  supply  bills,  lays  aside  10 
per  cent  of  the  cost  of  his  plant  to  offset  its  deterioration, 
pays  his  interest,  allows  interest  on  his  own  money  in- 
vested in  the  business,  and  allows  himself  finally  a  proper 
compensation  for  his  own  services,  he  is  extremely 
fortunate  if  anything  remains  in  the  way  of  profits. 

231.  The  farmer's  profits. — A  large  amount  of  what 
is  commonly  termed  profits  should  be  included  under 
some  of  these  categories.  A  farmer  invests  $5,000  in 
a  farm  of  one  hundred  acres.  He  hires  one  hand  at 
$200  per  year  and  board;  he  pays  $250  for  farm  and 
house  supplies  during  the  year;  he  pays  $50  taxes  and 
$100  for  other  expenses,  making  his  total  expenses  $600. 
He  sells  his  crops,  cattle  and  hogs  for  $1,200.  He 
believes,  and  properly  believes,  that  he  has  done  very 

^86 


PROFITS  287 

well  on  the  year's  work,  for  he  has  $600  clear  in  bank, 
but  can  he  show  any  profit? 

He  must  first  allow  for  interest  on  his  $5,000  at  5 
per  cent,  or  $250.  Then  his  property  has  depreciated 
to  some  extent  during  the  year;  his  barn,  for  example, 
is  one  year  nearer  to  the  time  when  it  must  be  painted 
and  re-shingled,  the  same  may  be  said  of  his  house 
and  other  buildings;  his  machinery  is  not  so  good  as 
it  was  at  the  first  of  the  year;  some  of  his  fields  will 
need  the  application  of  fertiHzer.  To  offset  his  ex- 
penses, he  may  have  some  colts  and  calves  which  may 
have  increased  in  value  during  the  year,  but  when  every 
allowance  has  been  made,  a  charge  of  2%  per  cent  for 
depreciation  on  the  cost  of  his  plant  is  no  more  than 
sufficient  to  offset  its  depreciation  in  value.  Deprecia- 
tion, then,  counts  for  $125  more,  leaving  $225  remain- 
ing. Most  farmers  would  consider  this  as  their  profit, 
but  this  assumption  is  incorrect.  An  allowance  must 
be  made  for  his  labor  on  the  farm,  and  the  labor  of  his 
wife  in  the  garden  and  dairy.  Surely  he  is  worth  twice 
as  much  as  he  pays  his  hired  man.  Allowing  him  $400 
as  wages  and  adding  the  cost  of  his  family's  living 
during  the  year  to  the  $225  remaining,  after  his  in- 
terest and  depreciation  have  been  paid,  and  taking  no 
account  of  his  wife's  labor,  his  receipts  will  nearly  bal- 
ance his  expenditures,  and  he  will  find  that  no  profit 
has  been  earned. 

This  case  is  exceptional  only  in  regard  to  the  amount 
of  money  that  the  farmer  has  on  hand  at  the  end  of 
the  year.  Few  farmers  can  show  such  an  amount  clear 
in  the  bank.  The  amount  of  farm  profits,  as  distinct 
from  wages  and  interest,  is  surprisingly  small.  After 
a  series  of  years,  taking  good  and  bad  seasons  together, 
profits  in  agriculture  have  been  small. 


J 


288  ECONOMICS 

232.  Manufacturing  and  railroad  profits. — It  is  the 
same  in  manufacturing  profits.  The  depreciation 
charges  should  here  never  be  less  than  10  or  15  per 
cent.  The  cost  of  wages  and  supplies  is  proportionately 
higher  and  the  profits  on  the  average  in  any  of  the 
manufacturing  businesses  are  small.  Even  the  rail- 
roads, which  are  commonly  supposed,  as  we  have  seen, 
to  be  among  the  most  profitable  of  industries,  show  a 
small  actual  profit  on  the  investment.  The  total  gross 
earnings  of  American  railways  during  the  year  1910 
were  $2,750,000,000.  Out  of  this  the  expense  of  opera- 
tion, including  wages,  supplies  and  taxes,  amounted  to 
$1,822,000,000;  interest  and  rentals  $567,853,000;  and 
dividends  $283,411,000.  There  remained  only  10  per 
cent  of  these  gross  earnings  available  as  profits,  and 
when  we  consider  that  the  stock  on  which  these  divi- 
dends were  paid  had  been  bought,  much  of  it,  at  high 
prices  by  the  owners  and  represents  their  investments, 
and  after  we  deduct  the  proper  allowance  for  interest 
on  this  investment,  it  is  safe  to  say  that  railway  com- 
panies show  very  small  profits.  In  fact,  many  com- 
panies, depreciation  being  considered,  are  running  be- 
hind. 

233.  Profits  difficult  to  make. — Furthermore,  in  es- 
timating the  profits  of  business,  no  account  is  taken  of 
the  losses.  It  is  a  well  known  fact  that  90  per  cent  of 
all  men  who  enter  business  fail  at  some  time  in  their 
business  career.  The  majority  of  the  large  corpora- 
tions in  the  United  States  have  been  at  some  time  bank- 
rupt. If  the  losses  of  business  could  be  averaged 
against  the  profits,  it  would  clearly  appear  that  the 
average  business  man  is  fortunate  if  he  secures  fair 
wages  of  superintendence  and  a  moderate  return  on  his 
capital  investment. 

Particularly  are  profits  difficult  to  make  under  con- 


PROFITS  289 

ditions  of  competition.  Competition  implies  the  sale 
of  the  same  commodity  by  independent  producers  to 
the  same  buyers.  Each  seller  tries  to  get  as  high  a 
price  as  he  can.  In  our  discussion  of  prices,  we  saw 
that  he  always  keeps  in  mind  the  cost  of  production 
and  that  he  will  not,  unless  forced  by  necessity,  go  below 
this  figure.  On  the  other  hand,  it  must  be  remembered 
that  he  will  sell  his  goods  below  the  cost  of  production 
rather  than  let  them  remain  idle,  or  allow  his  plant  to 
run  at  less  than  its  full  capacity. 

234.  Effect  of  high  prices. — Suppose,  for  example, 
that  pig  iron  costs  $14  per  ton  to  produce,  including  in 
the  cost  of  production  the  cost  of  material,  wages,  in- 
terest, depreciation  and  taxes.  As  long  as  the  demand 
for  iron  is  sufficient  to  take  all  the  amount  produced  at 
the  price  of  $20  per  ton,  there  is  a  very  large  profit 
in  its  production,  but  this  profit  encourages  the  pro- 
ducers to  extend  their  works.  This  attracts  others  into 
the  industry.  The  supply  of  iron  increases,  and  in  order 
to  sell,  prices  must  be  lowered.  The  price  may  fall  to 
$19,  to  $17,  to  $16  and  even  to  $15  before  the  mills 
which  are  the  most  expensive  to  operate  will  close  or 
even  reduce  their  production.  Even  then,  the  price  may 
go  on  falling,  if  the  other  mills,  whose  cost  of  produc- 
tion has  not  yet  been  reached,  will  make  up  the  defi- 
ciency and  maintain  the  supply.  The  decline  in  price 
will  continue  until  the  supply  is  reduced.  If  the  de- 
mand is  sustained,  the  curtailment  of  supply  will  cause 
prices  to  rise  again,  until  one  mill  after  another  is 
started,  but,  save  in  exceptional  circumstances,  the  price 
will  not  go  much  above  cost  at  the  poorest  mills,  and 
may  even  remain  below  that  figure  for  long  periods. 
No  producer  will  run  his  mills  when  he  is  not  earning 
expenses.     In  this  estimate  of  expenses,  however,  he 

1—19 


290  ECONOMICS 

considers,  as  a  rule,  merely  the  interest  which  he  has 
to  pay,  and  his  other  outgoings  for  materials  and  wages. 
He  will,  in  case  of  necessity,  disregard  altogether  the 
return  on  the  money  which  he  has  invested  on  his  own 
account,  and  in  extreme  cases,  he  will  even  sell  at  prices 
which  do  not  represent  more  than  a  part  of  the  interest 
charges  on  each  unit  of  his  output.  In  some  cases  he 
is  Hkely  to  conclude  that  it  is  better  to  earn  a  balance 
on  his  fixed  charges  and  keep  his  mill  going  than  not 
to  earn  any  of  them  and  close  it  down.  If  his  mill  is 
closed,  interest  goes  on  just  the  same  as  though  it  were 
open,  his  working  force  is  broken  up  and  his  customers 
are  lost,  and  his  business  is  in  danger  of  ruin.  The 
producer,  unless  absolutely  forced  to  suspend,  will, 
therefore,  continue  to  operate  his  plant  so  long  as  the 
returns  from  sales  exceed  the  amount  paid  for  wages, 
materials  and  repairs. 

235.  How  profits  are  made. — Although  it  must  be 
conceded  that  profits  are  difficult  to  earn,  we  know, 
nevertheless,  that  enormous  profits  have  been  received, 
a  fact  which  is  testified  to  by  the  large  fortunes  which 
have  been  made  by  producers.  There  is  one  man  in  the 
United  States  whose  fortune  is  said  to  be  $500,000,000. 
There  are  a  number  of  people  whose  fortunes  reach 
from  $20,000,000  to  $50,000,000.  There  are  over  two 
thousand  individuals  in  the  United  States  whose  for- 
tunes consist  of  $1,000,000.  These  large  accumulations 
of  wealth  have,  for  the  most  part,  been  accumulated 
out  of  the  profits  of  industry.  How  then  have  these 
profits  been  made?  We  may  distinguish  five  sources 
of  profits:  (1)  Appreciation  of  land  or  other  natural 
resources;  (2)  superior  ability;  (3)  extraordinary  and 
abnormal  demand  for  the  product ;  (4)  speculation;  (5) 
monopoly. 


PROFITS  291' 

236.  Appreciation  of  property. — Many  of  the  great 
fortunes  of  America  have  been  the  result  of  the  shrewd 
buying  of  some  natural  resource.  The  immense  wealth 
of  the  Girard  estate  is  mainly  due  to  the  appreciation 
in  the  value  of  the  anthracite  coal  lands,  purchased  at 
low  prices  one  hundred  years  ago  by  Stephen  Girard. 
The  wealth  of  the  Astor  family  came  from  persistent 
buying,  through  four  generations,  of  New  York  real 
estate,  which  has  steadily  grown  in  value.  A  large  part 
of  the  Hill  fortune  came  from  the  far-sighted  policy 
of  Mr.  James  Hill  in  buying  iron  ore  lands  in  Minnesota. 
These  instances  could  be  indefinitely  multipHed.  Nearly 
every  great  American  fortune  has  been  increased,  if  not 
entirely  created,  by  the  growth  in  value  of  the  various 
products  which  the  possessors  of  these  fortunes  have 
had  the  foresight  to  purchase  when  their  values  were 
low. 

237.  Superior  ability  as  a  source  of  profits. — In  the 
great  majority  of  cases,  the  large  profits  of  industry 
have  been  the  result  of  superior  ability.  We  have  seen 
that  most  business  men  do  not  make  profits;  a  few  men 
do  make  them.  The  primary  reason  for  this  distinction 
is  that  the  few  are  more  Hberally  endowed  with  brains 
than  the  many.  They  understand  their  business  better. 
They  are  better  able  to  take  advantage  of  opportunities 
for  profits  as  these  are  presented. 

The  Carnegie  Steel  Company  is  the  most  conspicuous 
illustration  of  manufacturing  success  and  enormous 
profits.  These  profits  are  largely  the  results  of  brains. 
This  company  started  with  a  small  forge  and  machine 
shop  nearly  forty  years  ago,  and  its  stock  and  bonds 
were  sold  in  1901  for  nearly  $500,000,000,  practically 
all  of  which  represents  the  accumulation  of  profits. 
These  profits  were  earned  because  of  superior  ability 


J 


292  ECONOMICS 

displayed  in  the  management  of  the  business.  Their 
ability  was  displayed  in  the  following  forms:  (1)  in 
re-investing  the  greater  part  of  the  earnings  of  the  bus- 
iness in  enlarging  the  plant;  (2)  in  purchasing  the  best 
machinery  no  matter  what  it  cost,  and  in  discarding  any 
apphance  for  which  a  better  substitute  could  be  had  so 
as  to  reduce  costs  of  production  to  the  lowest  possible 
figures;  (3)  in  giving  superintendents  and  foremen  an 
interest  in  the  business  so  as  to  insure  their  loyalty  and 
zeal;  (4)  in  producing  their  own  raw  material  so  that 
when  the  price  of  steel  rose  they  had  no  profits  to  pay 
to  the  iron  and  coal  miners;  (5)  in  equipping  their 
business  to  run  at  lowest  cost  by  operating  their  plants 
at  full  capacity,  crushing  many  of  their  weaker  com- 
petitors and  capturing  their  market.  The  writer  has 
elsewhere  described  the  advantages  of  the  Carnegie  Steel 
Company  as  follows :  ^ 

238.  Advantages  of  the  Carnegie  Steel  Company. — 
"The  Carnegie  Steel  Company  owned  the  most  com- 
plete, the  best-equipped,  and  the  best-managed  steel  plant 
in  the  United  States.  The  perfection  of  its  equipment 
in  point  of  independent  supplies  of  materials  and  trans- 
portation service  has  been  already  described.  No  one 
of  its  rivals  was  worthy  to  be  compared  with  it  in  point 
of  self-sufficiency  of  production.  This  equipment  sup- 
plied ore  and  fuel  to  the  mills  which  were  grouped  so 
closely  about  Pittsburgh  that  the  president  of  the  com- 
pany was  able  to  visit  some  department  of  each  mill 
on  successive  days.  The  Edgar  Thompson  furnaces 
and  mills  were  at  Bessemer,  two  miles  from  Pittsburgh; 
the  Duquesne  furnaces  and  mills,  four  miles  from  Pitts- 
burgh; and  the  Homestead  Steel  Works,  one  mile  from 
the  city.     Besides  these  larger  works,  there  were  located 

1  E.  S.  Meade,  "  Trust  Finance,"  p.  207. 


PROFITS  293 

in,  or  immediately  adjoining  the  city,  the  upper  and 
lower  Union  Mills,  the  Carrie  and  Lucy  Furnaces,  and 
the  Howard  Axle  Works.  All  these  plants  were  con- 
nected by  the  Union  Railway,  with  thirty-nine  miles 
of  track,  which  in  turn  connected  with  the  Pittsburgh, 
Bessemer  and  Lake  Erie  Railroad  to  the  north.  This 
arrangement  of  mines,  coke  ovens,  and  mills  was  the 
most  favorable  that  could  have  been  devised  for  econom- 
ical production. 

"The  mills  of  the  Carnegie  Steel  Company  were  con- 
centrated at  the  point  of  largest  present  advantage, 
where  materials  could  be  most  easily  assembled,  and 
from  which  the  largest  markets  could  be  most  easily 
reached.  It  was  this  fact  of  concentration  even  more 
than  their  superior  facilities  which  gave  the  Carnegie 
Steel  Company  their  most  pronounced  advantage. 

239.  Superior  equipment  in  machinery  and  men. — 
"The  advantages  of  the  Carnegie  Company  did  not 
stop  here.  Their  mechanical  equipment  was  superior 
to  that  of  any  other  mills,  and  their  business  was  the  best 
managed  of  any  in  the  country.  The  superior  equip- 
ment of  the  Carnegie  works  was  the  result  of  a  policy 
of  large  expenditure  upon  betterments  persistently  pur- 
sued for  many  years.  "Every  new  process  and  every 
new  machine  which  would  in  any  way  increase  the  effi- 
ciency, reduce  the  cost,  and  improve  the  product  of  the 
Carnegie  Company  has  been  adopted,  until  this  great 
concern  has  raised  the  physical  condition  of  its  mills 
to  a  point  which  is  unsurpassed."  Dividends  had  never 
been  considered  by  the  management.  Improvement 
had  been  the  one  thing  thought  of.  During  the  years 
1898  and  1899,  the  Carnegie  Company  expended  out 
of  earnings  upon  new  construction  and  betterments  no 
less  a  sum  than  $20,000,000. 


294j  economics 

"The  increased  earning  power  here  represented  was 
clear  gain.  No  deductions  had  to  be  made  for  interest 
payments.  The  policy  of  the  Carnegie  Company  was 
purely  industrial.  Financial  considerations  had  little 
weight.  Its  shares  were  never  in  the  market.  The 
greater  part  of  its  profits  was  each  year  invested  in 
the  plant.  As  Mr.  Carnegie  remarked,  he  and  his  part- 
ners knew  nttle  about  the  manufacture  of  stocks  and 
bonds.  They  were  only  conversant  with  the  manufac- 
ture of  steel. 

"The  management  of  the  Carnegie  Steel  Company 
represented  the  acme  of  productive  efficiency.  Every 
officer  had  risen  from  the  ranks  by  dint  of  compelling 
merit.  Every  head  of  a  department  had  an  interest  in 
the  business  apart  from  his  salary.  Trade  unionism 
had  been  banished  from  the  mills  in  1892,  and  the  work- 
men were  spurred  on  by  high  wages  and  the  promise  of 
advancement.  No  visitor  to  the  Carnegie  mills  could 
fail  to  be  impressed  with  the  intensity  of  the  effort  and 
the  strained  attention  evident  in  every  department. 
None  but  the  strongest  could  stand  the  terrific  pace. 
Breakdowns  were  frequent  at  thirty-five,  men  were  old 
at  forty-five.  The  famous  'iron-clad  agreement,'  it  has 
been  claimed,  was  designed  to  dispense  peaceably  with 
partners  who  had  outlived  their  usefulness.  Not  only 
was  money  lavishly  spent  on  salaries  and  wages,  but 
large  sums  were  paid  for  information.  The  result  of 
these  advantages  and  this  policy  appeared  in  the  revela- 
tions of  the  Carnegie-Frick  controversy,  when  the 
plaintiff  claimed  that  the  total  profits  of  the  company 
for  1898-99  exceeded  $70,000,000." 

Every  one  of  the  competitors  of  the  Carnegie  Steel 
Company  could  have  done  these  things  if  they  had  known 
how,  in  which  case  there  would  have  been  small  profits 


t 


PROFITS  295 

for  every  one,  and  prices  would  have  been  much  lower 
than  they  actually  were.  Because  the  Carnegie  Steel 
Company  for  many  years  employed  the  best  brains  in 
the  steel  industry,  they  were  able  to  produce  at  lower 
cost  than  their  competitors,  and  since  they  did  not  sup- 
ply the  entire  demand  of  the  market,  the  price  remained 
at  such  a  figure  that  they  kept  their  plants  at  work. 
This  price,  however,  left  the  Carnegie  Company  a  large 
margin  of  profit  which  as  we  have  seen  was  invested 
in  the  business.  Similar  illustrations  of  profits  received 
from  superior  brains  are  furnished  "by  every  business. 
The  man  with  superior  ability  may  sell  at  the  same  price 
as  his  competitors,  but  he  buys  cheaper  and  sells  in 
larger  quantities.  He  recognizes  that  the  highest  paid 
labor  is  the  cheapest,  that  liberal  advertising  pays,  and 
that  up-to-date  machinery  is  a  necessity.  He  is  alert 
to  take  advantage  of  every  opportunity.  As  a  result 
he  succeeds. 

It  is  useless  to  decry  the  great  American  fortunes  as 
the  result  of  railway  discrimination,  extortion,  oppres- 
sion of  labor,  monopoly,  etc.,  etc.  They  are,  with  hardly 
an  exception,  the  result  of  superior  ability.  We  may 
criticise  some  of  the  methods,  for  example,  of  Mr. 
Rockefeller  and  his  Standard  Oil  associates,  in  making 
large  profits  out  of  railway  rebates,  but  we  cannot  deny 
that  at  the  outset  each  one  of  Mr.  Rockefeller's  com- 
petitors had  the  same  opportunity  to  take  this  advantage 
of  the  railroads  that  he  had,  nor  that  his  remarkable 
success  shows  conclusively  his  greater  skill  at  the  game 
of  business. 

240.  Extraordinary  demand  for  the  product  a  source 
of  profit. — Profits  are  made  by  nearly  all  producers 
during  seasons  of  extraordinary  demand,  which  come 
at  intervals  to  every  industry.    The  hard  coal  strike  dur- 


296  ECONOMICS 

ing  1902  illustrated  this,  when  the  demand  for  bitumi- 
nous coal  resulted  in  large  profits  to  the  soft  coal  opera- 
tors. The  iron  and  steel  manufacturers  made  large 
profits  during  1906-1907.  The  United  States  Steel 
Corporation  in  1906  earned  20  per  cent  on  its  inflated 
common  stock.  As  a  result  of  large  purchases  of  equip- 
ment by  railways  during  that  period  the  manufacturers 
of  railway  equipment  made  large  profits.  When  the 
short  crop  of  wheat  in  Europe  coincides  with  the  full 
crop  here,  American  wheat  growers  prosper. 

As  we  saw  in  a  previous  section,  costs  of  production 
do  not  change  as  rapidly  as  prices,  and  the  result  is  that 
occasionally  every  producer  has  an  opportunity  to  make 
large  profits.  If  he  invests  these  profits  in  his  own 
business  or  some  other  profitable  business  he  will  im- 
prove his  financial  position.  If,  however,  as  the  ma- 
jority of  business  men  do,  he  considers  these  profits  as 
available  for  his  personal  expenditures,  or  in  cases  of 
corporations,  if  their  directors  distribute  most  of  their 
profits  in  dividends  to  stockholders,  assuming  that  they 
represent  a  permanent  income,  instead  of  viewing  them 
in  their  true  light,  as  occasional  and  temporary  gains, 
neither  the  individual  nor  the  corporation  will  be  bene- 
fited. 

241.  Speculation  as  a  source  of  profit. — The  fourth 
method  by  which  profits  are  made  is  by  speculation.  By 
this  term  we  mean  the  buying  of  commodities,  or  stocks, 
or  land  with  the  expectation  of  making  a  profit  from  the 
increase  in  its  value.  A  large  part,  perhaps  the  greater 
part,  of  American  speculation  is  carried  on  with  money 
borrowed  from  the  banks  on  the  security  of  the  things 
purchased.  This  fact  enables  a  speculator  with  $10,000 
of  his  own  to  purchase  one  thousand  shares  of  stock  sell- 
ing at  $100  per  share.     He  puts  in  his  $10,000,  and 


PROFITS  297 

his  broker  borrows  for  him  $90,000  more,  giving  as 
security  the  stock  purchased.  If  the  stock  advances 
$10  per  share,  the  speculator  doubles  his  money.  The 
same  method  is  employed  in  grain,  coffee  or  cotton 
operations,  and  also  in  speculating  in  real  estate. 

There  are  numerous  instances  of  great  profits  be- 
ing made  in  speculation.  For  example,  the  foundation 
of  P.  D.  Armour's  fortune  was  made  by  speculation  in 
pork.  The  foundation  of  the  Rockefeller  fortune  was 
laid  by  speculation  in  oil  lands.  To  perhaps  ninety- 
nine  men  out  of  every  hundred,  speculation,  aside  from 
the  risks  which  every  one  must  take  in  his  own  busi- 
ness, is  sure,  if  persisted  in,  to  result  in  heavy  losses. 
The  losses  in  speculation  are  far  greater  than  the 
gains.  It  is  true  that  inside  interests  in  many  large 
corporations  having  advance  information  as  to  dividend 
changes  or  consolidations,  favorable  or  unfavorable  to 
competition,  may,  with  perfect  safety,  buy  or  sell  the 
stock  affected  and  make  large  profits.  In  the  re-cap- 
italization of  enterprises  for  sale  to  the  public  in  the 
form  of  stocks  and  bonds,  large  gains  are  also  made 
by  the  syndicate  which  financed  the  trusts.  The  United 
States  Steel  Corporation  syndicate,  for  example,  is  re- 
ported to  have  cleared  100  per  cent  on  an  investment  of 
$25,000,000.  Even  in  the  stock  market,  where  the  risks 
of  loss  are  commensurate  with  the  chances  of  profit, 
the  great  fortunes  of  Gould,  Keene,  Widener,  and  many 
other  wealthy  men,  show  that  speculation  is  often  the 
road  to  wealth.  These  men  speculated,  however,  from 
inside  knowledge.  They  were  in  a  position  to  know 
what  would  happen  to  the  companies  in  whose  stocks 
they  speculated  in  the  way  of  dividend  payments  or 
consolidations,  and  on  the  basis  of  this  certain  knowledge 
they  could  not  fail  to  profit  in  most  of  their  operations. 


S98  ECONOMICS 

Large  fortunes  have  also  been  made  out  of  political 
influence,  which  is  frequently  purchased,  and  as  a  result 
of  which  valuable  franchises  and  privileges  have  been 
obtained  for  a  nominal  consideration.  These  methods, 
however,  while  available  to  the  few,  are  unavailable  to 
the  majority  of  producers.  The  number  of  men  who 
have  been  ruined  by  taking  chances  for  large  profits, 
in  other  words,  by  speculation,  is  enormously  greater 
than  those  who  have  profited  by  this  method. 

242.  Monopoly  as  a  source  of  profit. — The  fifth 
method  by  which  profits  have  been  made  is  by  obtaining 
a  position  of  monopoly  advantage.  Monopoly  has  al- 
ready been  defined  as  control  of  supply  so  that  demand 
has  a  larger  influence  upon  prices  than  under  competi- 
tion. There  can  be  no  question  that  if  a  monopoly 
position  can  be  obtained,  it  is  the  surest  and  safest  way 
to  earn  large  profits,  and  these  profits  will  be  received 
in  good  years  as  well  as  in  bad  years. 

The  first  form  of  monopoly  is  the  monopoly  of  ability. 
If  a  producer  takes  care  that  he  is  the  best  posted  man 
on  his  line  of  trade,  and  furthermore,  that  his  assistants 
are  second  only  to  himself  in  their  information  concern- 
ing his  business;  if  he  ensures  their  enthusiastic  fidelity 
and  interest  by  liberal  salaries  and  by  giving  them  a 
share  of  the  profits  in  addition;  if  he  ensures  the  best 
work  by  paying  the  best  wages,  he  is  in  a  fair  way  to 
secure  the  monopoly  of  brains  in  his  business,  and  to 
profit  accordingly. 

Monopoly  profits  have  never  been  looked  upon  with  favor  In 
the  United  States.  Even  the  suspicion  that  they  were  being 
enjoyed  has  sufficed  often  to  disturb  the  conditions  which  made 
them  possible,  either  because  consumers  have  combined  to  boy- 
cott the  monopolized  good  or  because  the  government  has  inter- 
fered.    Under  such  circumstances  it  has  been  but  natural  for 


I 


PROFITS  299 

monopolists  to  devise  numerous  expedients  for  concealing  their 
real  earnings. 

The  most  common  expedient  of  all  for  concealing  profits  is 
the  practice  of  inflating  the  capitalization  of  the  corporation. 
Where  a  business  is  organized  by  shrewd  men  who  foresee  its 
monopolistic  possibilities,  it  is  usual  to  start  with  a  grossly 
inflated  capitalization.  In  the  railway  business,  for  example,  it 
has  not  been  unusual  to  secure  all  of  the  capital  required  by  the 
sale  of  bonds  and  to  distribute  the  stock  as  a  pure  bonus.  In- 
dustrial combinations  as  organized  in  the  United  States  accom- 
plish the  same  result  by  putting  out  preferred  stock  equivalent 
to  the  actual  capital  invested  in  the  business  and  an  equal  or 
even  larger  amount  of  common  stock  as  a  bonus.  In  these  and 
other  ways  the  nominal  capital  of  an  enterprise  may  be  made 
from  the  first,  two,  three  or  even  five  or  ten  times  the  amount 
actually  invested  in  it.  Such  an  arrangement  permits  directors 
to  distribute  very  large  profits  as  dividends  on  the  nominal  capital 
without  exceeding  the  ordinary  rate  of  interest. 

It  often  happens,  even  when  large  monopoly  earnings  are  an- 
ticipated, that  the  nominal  capitalization  is  not  made  large 
enough  to  conceal  them.  In  such  cases,  and  in  the  more  usual 
cases  in  which  actual  and  nominal  capitalization  start  together, 
the  practice  of  "watering"  stock  to  conceal  excessive  earnings 
is  frequently  resorted  to.  This  consists  simply  in  issuing  new 
stock  for  which  no  equivalent  investment  is  required.  It  may 
be  accomplished  by  means  of  a  stock  dividend,  each  shareholder 
being  given  an  amount  of  new  stock  proportional  to  his  original 
holding ;  or  by  the  issue  of  new  stock  for  subscription  at  a  nomi- 
nal price,  subscriptions  being  open  only  to  shareholders,  direc- 
tors or  other  favored  investors.  By  these  means  the  nominal 
capitalization  may  be  expanded  to  keep  pace  with  earnings  and 
to  permit  the  distribution  of  the  latter  without  any  apparent 
increase  in  the  dividend  rate. — H.  R.  Seager,  "  Economics : 
Briefer  Course,"  pp.  146-7. 

243.  Monopoly  of  large  industries. — The  second  kind 
of  monopoly  is  the  monopoly  of  large  industries.     This 


300  ECONOMICS 

is  illustrated  by  the  recent  combinations  of  industries, 
which  are  called  trusts,  which  brought  together  a  large 
number  of  industries  under  a  single  control.  Other 
examples  are  furnished  by  any  business  in  which  a  great 
amount  of  capital  has  been  intelligently  invested,  so  that 
it  has  obtained  the  advantage  of  a  large  scale  of  produc- 
tion. The  advantages  of  the  large  producer  are  con- 
siderable. He  gets  the  best  men  and  best  equipment. 
The  large  producer  buys  cheaper,  and  he  sells  at  less 
expense  than  his  small  competitors.  He  makes  a  more 
efficient  disposition  of  the  by-products  of  his  business. 
He  can  spend  more  money  in  improvements.  He  does 
more  business  as  compared  with  his  competitors  and, 
therefore,  at  lower  cost.  Not  only  is  the  cost  of  j)ro- 
duction  to  the  large  producer  lower  than  to  his  smaller 
competitors,  but,  because  Ms  prices  are  controlled,  the 
average  price  obtained  is  higher  and  violent  fluctuations 
are  not  so  numerous.  Monopoly  prices  do  not  rise  so 
high  as  under  competition  and  do  not  fall  so  low.  The 
prices  are,  therefore,  higher  than  under  competitive  con- 
ditions. Large  business  organizations,  it  is  expected, 
will  eventually  control  most  branches  of  production  in 
the  United  States.  These  organizations,  either  because 
of  their  size  or  because  agreements  between  them  can 
be  more  easily  effected,  as  they  are  few  in  number, 
already  have  many  of  the  advantages  of  monopoly. 

244.  Franchises  and  patents. — The  third  form  of 
monopoly  is  the  legal  monopoly  of  a  franchise  or  a 
patent.  A  franchise  is  the  right  to  use  public  property 
for  business  purposes,  as,  for  example,  to  use  the  streets 
of  a  city  for  street  railway  tracks.  These  grants,  being 
for  most  purposes  exclusive,  are  in  large  cities  enor- 
mously profitable  since  they  have  usually  been  given 
without  compensation.     One  street  railway  company  in 


PROFITS  301 

Philadelphia,  for  example,  pays  72  per  cent  dividends 
on  its  stock  and  others  pay  from  25  to  40  per  cent.  In 
recent  years,  however,  there  has  been  evident  a  growing 
disposition  on  the  part  of  the  public  to  exact  suitable 
compensation  from  the  holders  of  franchises,  and  to 
make  these  grants  only  for  short  periods,  thus  greatly 
limiting  the  profits  which  can  be  made  from  this  source. 
A  patent  is  an  exclusive  right  granted  by  the  United 
States  government  to  the  inventor  of  a  useful  machine 
or  process,  to  make  and  sell  his  invention  for  a  term  of 
seventeen  years.  Large  fortunes  have  been  made  from 
patents  but  the  original  inventors  have  made  less  than 
those  who  purchased  their  inventions,  and  only  a  small 
percentage  of  the  patents  granted  prove  to  be  valuable. 
245.  Monopoly  of  quality. — The  fourth  and  last 
form  of  monopoly  is  open  to  every  producer.  It  is 
the  monopoly  of  quality.  Many  manufacturers  are 
thriving  and  making  large  amounts  of  money  to-day 
because  they  are  producers  of  specialties,  which  are  pro- 
tected either  by  patents  or  by  special  knowledge  in  which, 
therefore,  there  is  no  competition,  and  which  they  can 
sell  at  a  price  which  gives  a  liberal  margin  of  profit. 
The  advertising  pages  of  every  magazine  are  full  of 
examples  of  this  kind  of  monopoly.  Royal  Baking 
Powder,  Shredded  Wheat  Biscuit,  the  Elgin  Watch  and 
the  Victor  Talking  Machine  are  instances  in  point. 
Enormous  fortunes  have  been  made  out  of  this  monopoly 
of  quality.  This  form  of  monopoly  is  also  built  up  by 
skillful  advertising.  Every  year,  in  the  United  States^, 
more  than  one  billion  dollars  is  spent  in  advertising.  In 
various  ways,  there  is  built  up,  as  a  result  of  this  vast 
expenditure,  in  the  minds  of  the  buyer,  an  association  be- 
tween his  wants  and  the  article  advertised.  When  he 
thinks  of  shoes,  the  names  Regal  and  Douglas  are  sug- 


S02  ECONOMICS 

gested ;  of  hats,  Knox  or  Stetson ;  of  collars,  the  Arrow 
Brand,  and  so  on.  This  form  of  monopoly,  next  to  the 
monopoly  of  a  franchise,  is  the  most  enduring  and  the 
most  profitable.  To  an  increasing  extent  producers 
are  coming  to  rely  upon  advertising  to  establish  their 
business  on  the  enduring  foundation  of  the  association 
of  ideas. 

Speciahzation  in  manufacturing  in  order  to  obtain 
such  a  position  of  monopoly  advantage  is  open  to  every 
one.  Ceaseless  study  and  constant  attention  to  the  pro- 
duction of  some  one  thing,  coupled  with  good  business 
judgment,  will,  in  time,  place  the  producer  in  a  position 
of  monopoly  advantage  but  his  monopoly  will  be  one  of 
quaUty  and  distinctiveness.  If  protected  by  patents  and 
backed  by  advertising,  this  form  of  monopoly  is  likely 
to  prove  more  permanently  profitable  than  any  other 
form. 


CHAPTER  IX 

TAXATION 

246.  Functions  of  government. — The  fourth  share  in 
distribution,  with  an  examination  of  which  we  will  con- 
clude Part  III  of  this  book,  is  the  share  which  the  state 
lakes  in  taxes.  In  the  accounts  of  every  corporation  ap- 
pear payments  for  this  item.  Every  property  holder 
in  the  United  States  contributes  to  the  support  of  the 
state.  Furthermore,  owing  to  their  purchases  of  com- 
modities which  are  taxed  by  the  United  States  govern- 
ment, it  can  be  said  that  every  man,  woman  and  child  in 
the  United  States  pays  taxes. 

Before  considering  the  principles  which  govern  the 
assessment  of  the  different  kinds  of  taxes,  we  must 
ascertain  the  reason  for  the  payment  of  taxes.  Taxes 
are  necessary  to  provide  for  the  support  of  the  different 
divisions  of  government.  The  functions  of  the  govern- 
ment are  twofold;  first,  to  secure  to  each  individual  the 
enjoyment  of  all  the  privileges  consistent  with  the  en- 
joyment of  similar  privileges  by  others;  and  second, 
to  further  the  welfare  of  its  citizens. 

Under  the  first  heading,  we  include  what  are  known 
as  the  negative  functions  of  the  government,  and  under 
the  second  the  positive  functions.  Examples  of  the 
negative  functions  of  the  government  are  the  protection 
of  society  against  criminals,  the  establishment  and  en- 
forcement of  regulations  governing  the  transfer  of 
property;  the  inspection  of  foods  and  buildings  to 
ensure  purity  and  safety;  the  isolation  of  cases  of  in- 

303 


J 


304  ECONOMICS 

fectious  diseases;  the  laws  regulating  the  collection  of 
debts,  and  the  regulation  of  railway  rates  and  fares.  In 
each  of  these  functions,  it  will  be  observed  that  the  gov- 
ernment does  no  more  than  to  protect  the  citizen  against 
injury  and  injustice  from  his  fellows. 

The  positive  functions  of  government  include  two 
classes  of  services,  ( 1 )  those  which  the  government  per- 
forms because  it  is  the  government ,  and  whose  expenses 
the  individual  must  pay  whether  he  will  or  not;  and  (2) 
those  services  which  the  government  performs  as  a  busi- 
ness corporation,  and  of  which  the  citizen  may  avail  him- 
self or  not  as  he  chooses.  Examples  of  the  first  class  are 
the  construction  of  roads,  streets,  sewers,  the  improve- 
ment of  rivers  and  harbors,  the  coining  and  issuing  of 
money,  protection  against  fire,  the  care  of  the  sick,  poor 
and  infirm,  and  the  maintenance  of  free  schools.  These 
services  are  paid  for  out  of  the  revenue  of  the  state,  and 
are  rendered  gratuitously  to  the  individual  who  profits 
by  them.  Examples  of  the  second  class  of  services  which 
may  be  called  the  industrial  services  of  government, 
are  the  transmission  of  mails,  the  furnishing  by 
municipalities  of  light,  heat,  water  and  power,  the  pro- 
vision for  education  where  payment  is  required,  the  con- 
duct of  savings  banks,  and  the  transmission  of  telegraph 
messages.  The  payment  for  these  services  is  made 
voluntarily  by  the  individual  to  whom  the  services  are 
rendered.  These  payments  are  known  as  fees  or  prices 
as  distinguished  from  taxes  which  we  have  presently  to 
define. 

247.  Taxes  defined. — All  the  negative  functions  of 
government,  and  the  first  class  of  positive  functions,  are 
supported  from  the  proceeds  of  taxes.  A  tax  may  be 
defined  as  "a  general  compulsory  contribution  levied 
upon  persons,  natural  or  corporate,  under  the  authority 


It 


TAXATION  305 

of  the  public  power."  The  most  significant  feature  of 
the  tax  is  its  compulsory  character.  The  citizen  must 
pay,  no  matter  what  may  be  his  individual  opinion  as  to 
the  justice  of  the  tax  imposed  upon  him.  This  com- 
pulsory character  of  taxation  is  so  generally  emphasized 
that  most  persons  lose  sight  of  the  fact  that,  considered 
from  another  standpoint,  the  tax  is  a  payment  by  the 
citizen  for  numerous  and  important  benefits  conferred 
upon  him  by  the  state.  We  have  only  to  contrast  what 
our  condition  would  be  under  a  state  of  anarchy  or  no- 
government,  with  what  it  is  under  an  orderly  and  well- 
established  government,  to  see  that  the  sacrifices  which 
men  would  make  in  order  to  provide  a  stable  government 
far  exceed  the  sacrifice  actually  involved  in  the  payment 
of  taxes. 

248.  Basis  of  taxation. — The  basis  of  taxation  is  the 
ability  of  the  individual  to  pay  taxes.  The  government 
needs  revenue,  and  it  taxes  the  individual  according  to  his 
ability  to  pay,  as  the  easiest  method  of  obtaining  the 
funds  it  requires.  It  is  true,  however,  that  the  benefit 
which  the  individual  receives  from  the  activities  of  the 
state  depend  upon  the  amount  of  property  that  he 
enjoys,  and  we  would  not  be  incorrect  in  saying,  there- 
fore, that  taxes  are  not  only  based  upon  the  abiHty  to 
pay,  but  also  upon  the  benefits  derived  from  the  govern- 
ment which  is  supported  by  the  taxes. 

249.  Maxims  of  taxation. — The  maxims  of  taxation 
are  as  follows: 

(1)  Taxation  should  be  levied  according  to  the  re- 
spective ability  of  the  taxpayer. 

(2)  Taxes  should  be  certain  and  not  arbitrary.  "The 
time  of  payment,  the  manner  of  payment,  the  quantity 
to  be  paid  ought  to  be  clear  and  plain  to  the  contributor 
and  to  every  other  person." 

1—20 


306  ECONOMICS 

(3)  Every  tax  ought  to  be  levied  "at  the  time  or  in  the 
manner  in  which  it  is  most  likely  to  be  convenient  for 
the  contributor  to  pay." 

(4)  The  expense  of  collecting  taxes  should  be  as  low 
as  possible. 

(5)  Taxes  should  above  all  other  things  be  adequate 
to  the  needs  of  government.  The  vi^orst  taxes  are 
justified  under  this  maxim  by  the  plea  of  public 
necessity. 

(6)  A  tax  system  should  be  elastic,  so  that  its  yields 
may  be  increased  or  diminished  as  the  necessity  of  the 
government  requires. 

(7)  Taxation  should  be  levied  in  such  a  way  so  as  to 
interfere  as  Uttle  as  possible  with  the  industrial  activities 
of  the  nation. 

250.  Forms  of  taxation. — ^We  have  next  to  consider 
the  forms  of  taxation,  and  to  examine  the  most  im- 
portant examples  under  each  form.  Taxes  may  be  gen- 
erally divided  into  direct  and  indirect  taxes.  Direct 
taxes  are  those  levied  upon  the  individual  who  is  expected 
ultimately  to  pay  them.  Indirect  taxes  are  levied 
either  upon  commodities  or  individuals  as  producers 
in  the  expectation  that  the  person  who  advances 
the  tax,  for  example,  the  manufacturer  of  cigars, 
will  be  able  to  shift  the  burden  in  whole  or  in  part  upon 
others. 

251.  Advantages  of  direct  taxation. — The  advan- 
tages of  direct  taxes  are  as  follows:  (1)  Their  yield 
may  be  more  certainly  calculated  than  in  the  case  of  in- 
direct taxes,  because  they  will  be  paid  by  one  person 
upon  whom  they  are  levied;  and  (2)  they  can  be  more 
easily  and  cheaply  collected.  Their  disadvantages  are: 
( 1 )  Their  unpopularity,  since  the  average  individual  is 
opposed  to  the  payment  of  taxes;  and  (2)  the  danger  of 


TAXATION  307 

fraud  and  deception  in  the  declaration  of  the  amount  of 
property  or  income  upon  which  the  tax  is  based. 

252.  Advantages  of  indirect  taocation. — The  advan- 
tages of  indirect  taxation  are :  ( 1 )  Because  its  burden 
is  concealed,  owing  to  the  fact  that  it  appears  in  the  price 
of  commodities,  and  because  the  consumer,  as  we  have 
before  shown,  does  not  understand  in  what  way  prices  are 
fixed.  Indirect  taxes,  for  example,  on  sugar  and 
tobacco,  are  paid  by  the  consumer  little  by  little  as  he 
purchases  these  commodities,  and  the  burden  of  payment 
is  not  perceived.  (2)  Indirect  taxation  makes  it  pos- 
sible to  reach  the  tax-paying  capacity  of  the  middle  and 
lower  classes  who  have  no  property,  and  whose  income 
consists  of  their  wages  or  salaries.  Their  capacity  can- 
not be  reached  by  direct  taxation,  but  they  can  be  made 
to  pay  indirect  taxes  on  their  daily  consumption. 

The  disadvantages  of  indirect  taxation  are :  ( 1 )  The 
yield  of  indirect  taxes  cannot  be  accurately  calculated, 
in  view  of  the  fact  that  the  amount  of  retail  purchases  of 
taxed  articles  is  a  fluctuating  quantity.  (2)  Indirect 
taxes  cost  more  to  collect,  owing  to  the  fact  that  they 
are  collected  throughout  the  year,  while  direct  taxes  are 
collected  within  a  short  time;  and  furthermore,  a  large 
corps  of  officials  is  necessary  in  the  collection  of  indirect 
taxes  to  make  sure  that  dutiable  articles  do  not  escape 
the  tax.  (3)  Indirect  taxes  are  objectionable  because 
they  seriously  interfere  with  industry.  Industries  whose 
products  are  taxed  must  be  carried  on  so  as  to  facili- 
tate, as  far  as  possible,  the  collection  of  taxes  rather 
than  with  sole  reference  to  economical  production. 

253.  General  property  tacc. — Taking  up  now  the 
special  forms  of  direct  taxation  we  have  the  general 
property  tax.  The  basis  of  assessment  of  this  tax  is  the 
real  and  personal  property  owned  by  the  taxpayer. 


308  ECONOMICS 

The  tax  is  paid  out  of  the  income  of  the  taxpayer  and 
forms  a  lien  on  his  property.  In  the  United  States  the 
general  property  tax  is  usually  employed  in  systems  of 
state  and  local  taxation.  For  state  purposes,  the  tax  is 
assessed  among  the  counties  according  to  their  respective 
property  valuations,  and  county  taxes  are  usually 
assessed  in  the  same  way  among  the  townships.  These 
taxes  are  collected  by  elected  assessors,  who  ascertain 
"the  full  cash  value  of  real  and  personal  property,"  and, 
if  necessary,  obtain  a  declaration  of  the  value  of  his 
property  from  the  taxpayer. 

The  objections  to  the  general  property  tax  are  as 
follows :  ( 1 )  Lack  of  uniformity  of  assessment.  This 
applies  particularly  to  state  taxes,  which  are  assessed,  as 
we  have  seen,  upon  the  counties  according  to  their  re- 
spective property  valuations.  Each  county  tries  to  make 
its  valuation  as  low  as  possible  in  order  to  reduce  its  con- 
tribution to  the  share  of  the  expenses  of  the  state.  (2) 
Lack  of  unformity  in  the  assessment  of  different  kinds 
of  property ;  real  estate  and  visible  property  are  usually 
assessed  at  higher  rates  than  stocks,  bonds  and  other 
forms  of  property  which  are  not  visible,  and  the  existence 
of  which  may  be  concealed  by  the  taxpayer.  It  is  a  well 
known  fact  that  men  with  large  political  influence  are 
taxed  in  many  places  on  a  lower  basis  of  valuation  than 
the  average  man  can  obtain.  Furthermore,  under  the 
general  property  tax,  the  houses  of  the  poorer  class, 
being  assessed  at  their  selling  valuation,  are  necessarily 
assessed  at  a  higher  rate  than  the  house  of  the  rich,  which 
as  a  rule  will  sell  but  for  a  fraction  of  the  money  which 
has  been  invested  in  them.  The  general  property  tax 
exempts  from  taxation  all  incomes  not  connected  with 
property,  as  for  example,  professional  salaries.  (3) 
The  evil  of  double  taxation  is  general.    Few  states  al- 


TAXATION  309 

lo^  any  deduction  upon  the  property  of  debtors.  The 
result  is  the  debtor  is  taxed  twice,  both  on  what  he  has, 
and  on  what  he  owes. 

The  only  argument  which  can  be  advanced  in  support 
of  the  general  property  tax  is  that  it  now  occupies  the 
field,  and  that  it  would  be  difficult  to  change  it.  Some 
of  the  most  radical  defects  in  the  administration  of  the 
taxes  can  be  done  away  with.  Thus  it  has  been  found 
that  the  evils  of  competitive  undervaluation  may  be 
avoided  by  allowing  the  expenses  of  the  state  to  be  paid 
by  a  tax  on  one  form  of  property,  such  as  personal  prop- 
erty, and  the  expenses  of  the  locality  from  the  tax  on 
real  estate.  Inequality  of  assessment  as  between  in- 
dividuals may  be  remedied  by  giving  publicity  to  the 
assessment,  and  by  making  the  assessor  appointive 
instead  of  elective.  Even  when  everything  possible  has 
been  done,  however,  to  improve  the  administration  of  the 
general  property  tax,  it  still  remains  a  very  objectionable 
form  of  imposition. 

254.  Income  tax. — The  income  tax  assesses  the  tax- 
payer upon  the  basis  of  his  ability  to  pay  as  evidenced 
by  his  income.  Its  advantages  are:  (1)  It  is  based 
directly  upon  the  ability  of  the  taxpayer;  (2)  it  cannot 
be  shifted,  since  it  is  not  levied  upon  commodities  whose 
price  can  be  raised,  but  upon  persons;  (3)  if  the  prin- 
ciple of  stoppage  at  the  source  is  adopted,  by  which  is 
meant  the  collection  of  the  income  before  it  reaches  the 
hands  of  the  recipient,  as  for  example,  the  payment  of 
the  income  by  a  corporation  for  its  stockholders,  evasion 
of  the  income  tax  by  falsification  can  be  made  extremely 
difficult.  (4)  The  income  tax  reaches  income  which  is 
not  connected  with  corresponding  amounts  of  property. 
(5)  Income  taxation  is  more  equal  than  any  form  of  in- 
direct taxation.     Indirect  taxation  unduly  burdens  the 


310  ECONOMICS 

poorer  classes  who  may  consume  as  large  a  quantity  of 
taxable  commodities  as  their  wealthier  neighbors,  but 
whose  tax -paying  ability  as  based  upon  their  income  is 
much  smaller.  Under  the  income  tax,  however,  the 
poorer  class  will  pay  Uttle  or  nothing  to  the  state  while 
the  tax  burdens  of  the  wealthy  would  be  barely  according 
to  their  ability.  (6)  The  sixth  advantage  of  the  income 
tax  is  its  elasticity.  It  responds  quickly^  to  any  change 
in  the  rate  of  assessment. 

The  objections  to  the  income  tax  are:  (1)  the  in- 
quisition into  the  private  affairs  of  the  taxpayers  which 
it  necessitates,  and  which  renders  this  form  of  taxation 
very  unpopular;  (2)  the  fact  that  temporary  income 
derived  from  business  or  professions  which  terminate 
with  the  life  of  the  recipients  and  which  are  the  result  of 
their  personal  exertions  are  taxed  at  the  same  rate  as 
incomes  from  land  and  property  which  are  permanent 
and  which  do  not  depend  upon  the  eff'orts  of  those  who 
receive  them. 

The  income  tax  is  a  prominent  feature  of  English 
taxation,  having  been  introduced  in  1842.  It  was  em- 
ployed in  the  United  States  during  the  Civil  War,  along 
with  several  other  kinds  of  taxes,  but  it  was  repealed 
after  the  war  closed.  In  1894,  an  income  tax  law  was 
passed  which  was  to  apply  only  to  those  incomes  in  excess 
of  $4,000.  This  law  was,  however,  declared  unconsti- 
tutional in  1895;  but  in  1913  the  constitutionality  of  an 
income  tax  was  reaffirmed  by  an  amendment. 

255.  Single  tax  on  land  values. — The  most  prominent 
advocate  of  the  single  tax  on  land  values  was  Henry 
George,  and  his  theory  of  the  single  tax  is  treated  in 
his  book  entitled  "Progress  and  Poverty."  This  theory 
is  based  upon  definite  assumptions  which  are  as  follows : 
Capital  is  but  a  form  of  labor,  therefore,  the  returns  to 


TAXATION  311 

capital  and  labor  must  always  tend  to  equality.  To  the 
employment  of  labor  and  capital  land  and  other  natural 
agents  are  indispensable.  This  land  is  of  all  degrees  of 
productiveness,  and  when  found  in  towns  and  cities,  it  is 
of  all  degrees  of  advantage  of  location.  Under  the 
institutions  of  private  property  in  land,  these  natural 
resources  are  monopolized.  The  returns  to  labor  are 
measured  by  the  product  of  labor  on  the  most  productive 
lands  open  to  the  laborer's  free  use  and  occupation. 
The  owners  of  the  better  grades  of  land,  therefore,  can 
exact  from  the  laborer  all  the  surplus  product  after  the 
yield  of  the  lands  which  are  open  to  free  occupation,  be- 
cause they  can  at  any  time  hire  labor  at  a  rate  of  wages 
measured  by  the  return  of  labor  on  the  poorest  land  cul- 
tivated for  the  market.  The  same  reasoning  applies 
to  the  return  of  capital  when  employed  on  the  better 
grades  of  land.  It  can  obtain  no  higher  rate  of  returns 
than  the  capital  employed  on  land  not  yet  monopolized. 
All  tlie  returns  of  the  better  lands  above  the  returns  on 
the  poorest  lands,  therefore,  go  to  the  landlord.  As 
labor  and  capital  increase  their  efficiency,  since  they  can 
find  employment  nowhere  to  better  advantage  than  on 
monopolized  lands,  the  demand  for  land  constantly  in- 
creases. The  result  is  that  all  the  gains  of  civilization 
go  to  the  landlord.  All  the  returns  from  inventions 
and  improvements,  and  all  the  returns  from  increased 
productiveness  are  absorbed  by  the  owner  of  the  natural 
resources.  The  consequence  is  that  poverty  tends  to 
persist  in  the  midst  of  advancing  wealth,  and  is  most 
extreme  where  wealth  is  most  abundant.  This  argu- 
ment supplies  a  fairly  accurate  statement  of  the  conven- 
tional theory  of  rent,  to  which  reference  has  been  made 
in  our  discussion  of  this  subject. 

256.  Proposition  of  the  single  tax. — In  order  that 


812  ECONOMICS 

there  may  be  a  fair  division  of  the  income  of  society 
the  single  taxer  proposes  that  rents  should  be  confiscated, 
that  all  incomes  not  due  to  the  investment  of  capital  or 
exertion  of  labor,  should  be  taken  over  by  the  state. 
The  justice  of  this  proposition  is  defended  on  the  ground 
that  the  landlord  did  not  create  the  value  of  the  land; 
that  this  was  done  for  him  by  society  at  large,  and  that, 
therefore,  society  can  take  over  that  which  it  has  created. 
This  appropriation  of  rent  by  the  state  is  to  be  effected, 
according  to  the  single  taxer,  by  the  imposition  of  a  tax 
rent  which  will  rise  as  returns  rise  and  which  will  sub- 
stitute the  state  for  the  landlord.  Other  taxes  it  is  pro- 
posed to  abolish.  It  is  claimed  that  the  single  tax  would 
not  only  provide  a  revenue  sufficient  for  the  requirements 
of  government,  but  that  it  would  also  correct  existing 
inequalities  in  distribution  by  turning  over  to  the  owners 
of  capital  and  labor,  a  large  share  of  the  rewards  of 
their  labor  and  saving. 

257.  Fiscal  objections  to  the  single  tax. — The  ob- 
jections to  the  single  tax  may  be  divided  into  two  classes : 
(1)  Fiscal  objections,  and  (2)  economic  objections. 
The  first  fiscal  objection  to  the  single  tax  is  due  to  its 
inelasticity.  The  pecuniary  needs  of  government  rise 
and  fall.  The  rents  of  land  and  other  natural  agents  do 
not  change  with  the  same  rapidity.  As  a  consequence 
of  this  inelasticity,  if  the  single  tax  were  adopted,  and 
if  the  government  lived  up  to  its  income,  as  it  usually 
does,  in  some  years  there  would  be  a  large  deficit,  and 
in  other  years,  a  large  surplus,  a  most  undesirable  con- 
dition of  affairs.  The  second  objection  is  that  the  single 
tax  could  not  be  collected.  As  applied  to  ground  rents 
in  cities  there  might  be  no  difficulty.  A  large  part  of 
the  value  of  agricultural  land  is,  however,  due  to  the 
investment  of  capital  in  improvements.     It  would  be 


TAXATION  313 

impossible  to  separate  the  returns  to  capital  from  the 
returns  on  "bare  lands"  and  since  the  single  tax  pro- 
poses to  exempt  capital  from  taxation,  this  tax  cannot 
be  collected  on  farming  land. 

258.  Economic  objections  to  the  single  tax, — The 
economic  objections  to  the  single  tax  are:  (1)  poverty- 
is  rapidly  diminishing  in  every  civilized  country,  which 
contradicts  the  assumption  upon  which  the  single  tax 
theory  is  erected;  (2)  that  wages  are  paid  by  an  employ- 
ing class  as  we  have  seen,  and  that  the  larger  the  amount 
of  capital  seeking  investment,  the  greater  the  demand 
for  land  and  labor,  which  explains  the  general  rise  in 
wages  all  over  the  world;  (3)  a  large  amount  of  this 
increased  demand  for  labor  comes  from  the  landlords 
who  do  not  consume  all  their  own  income  from  rents, 
but  who  save  and  invest  a  large  portion  of  this  in  pro- 
ducing capital;  (4)  the  single  tax  offers  only  a  partial 
remedy.  Land  is  not  the  only  monopoly,  and  there 
are  other  unearned  increments  besides  rent.  The  aboli- 
tion of  one  form  of  monopoly,  without  attacking  an- 
other, is  inconsistent.  (5)  The  final  objection  to  the 
single  tax  is  that  it  strikes  at  the  foundation  of  present 
economic  society  by  attacking  the  institution  of  private 
property.  If  the  landlord  is  to  be  deprived  of  his  land, 
the  owners  of  all  other  forms  of  property  will  feel  in- 
secure in  their  holdings.  The  adoption  of  the  single 
tax  would,  therefore,  be  a  socialistic  measure,  and  on 
that  account  objectionable. 

It  has  been  claimed  that  the  tendency  of  economic  progress 
is  to  cause  a  decided  increase  in  rents.  In  agriculture,  it  is  said, 
the  law  of  diminishing  returns  drives  producers  constantly  to 
cultivate  poorer  lands.  This  increases  the  differential  rents  se- 
cured from  better  lands.  In  the  case  of  town  lots,  it  is  urged 
that  every  increase  of  population  raises  rentals  in  a  marked 


814  ECONOMICS 

manner.  All  such  increases  of  rents,  it  is  thought,  are  due 
solely  to  the  growth  of  society,  not  to  the  activity  of  the  par- 
ticular landowners  whose  rentals  are  raised.  Hence  the  expres- 
sion "the  unearned  increment"  has  been  applied  to  this  growth 
of  rent  produced  by  social  development. 

Those  who  speak  of  the  unearned  increment  commonly  over- 
look the  losses  that  many  landowners  suffer.  Large  sums  spent 
in  developing  city  real  estate  have  been  entirely  lost,  as  the 
enterprises  have  often  proved  failures.  Changes  in  the  loca- 
tion of  street  railways  or  in  the  movement  of  fashion  or  business 
from  one  section  to  another,  lower  rents  in  some  sections  of  a 
city  nearly  as  much  as  they  increase  them  in  another.  The 
development  of  facilities  for  rapid  transit  tends  to  decrease  the 
demand  for  city  lots  for  residence  purposes.  In  the  case  of 
agricultural  lands,  rents  have  been  lowered  repeatedly  over  large 
sections  of  country.  In  England,  agricultural  rents  have  been 
lowered  greatly  by  the  competition  of  cheaper  wheat,  beef,  and 
pork  produced  in  the  United  States.  In  the  eastern  portion  of 
this  country  agricultural  rents  have  been  lowered  by  the  opening 
up  of  the  wheat  lands  of  the  West.  Many  farms  in  New  Eng- 
land cannot  be  rented  for  enough  to  pay  interest  on  buildings 
and  improvements  on  the  land.  If  we  set  off  these  decreases 
against  the  increases  of  rent  that  have  been  caused  by  social 
development,  the  net  unearned  increment  received  by  landowners, 
as  a  class,  is  very  much  smaller  than  is  usually  represented. 

Only  in  the  case  of  landowners  who  own  particularly  desir- 
able tracts  of  land  can  it  be  claimed  that  there  is  a  great  un- 
earned increment.  Some  favored  situations  in  the  business 
centers  of  cities,  some  sites  available  for  docks,  for  terminal 
facilities  for  railroads,  etc.,  have  become  enormously  valuable, 
so  that  a  large  unearned  increment  has  been  received. — C.  J. 
Bullock,  "Introduction  to  the  Study  of  Economics,"  pp.  445-6. 

259.  The  inheritance  tax. — Inheritance  taxes  are 
duties  imposed  upon  the  succession  to  property  after 
death.  This  form  of  taxation  is  justified  on  various 
grounds:     (1)  As  a  socialistic  measure  to  insure  the 


TAXATION  315 

diffusion  of  wealth;  (2)  as  a  form  of  income  tax — a 
tax  on  "fortuitous  income,"  that  is,  an  income  tax  not 
collectible  during  the  lifetime  of  the  decedent,  and 
paid  for  by  his  successors;  (3)  the  inheritance  tax  is 
easily  and  cheaply  collected  and  cannot  be  evaded,  for 
it  is  paid  when  the  estate  is  administered. 

The  principles  upon  which  inheritance  taxes  are 
levied  in  various  countries  are  as  follows:  (1)  small 
estates  are  exempt;  (2)  collateral  inheritances  as  by 
nephews  or  cousins  are  taxed  at  a  higher  rate  than 
direct  inheritance  by  sons;  (3)  the  principle  of 
progression  also  applies ;  in  some  cases  large  inheritance 
being  often  taxed  at  a  higher  rate  than  small;  (4)  the 
only  limitation  to  the  rate  of  inheritance  tax  is  the 
danger  that  if  the  rate  is  fixed  too  high,  the  tax  may  be 
evaded  by  giving  away  of  property  before  his  death. 

In  the  United  States  at  the  present  time  the  inher- 
itance tax  is  enforced  in  a  large  number  of  the  states. 
New  York,  Connecticut,  Massachusetts,  New  Jersey, 
Pennsylvania,  Ohio,  California  and  Illinois  are  the 
most  important.  This  form  of  taxation  has  been  gen- 
erally employed  in  the  United  States,  primarily  on 
account  of  the  failure  of  the  general  property  tax 
to  reach  personal  property. 

An  unequal  distribution  of  wealth  must  result  from  the  in- 
stitution of  private  property  so  long  as  individuals  and  families 
differ  greatly  in  earning  capacity  and  in  prudence  and  fore- 
thought. Where  these  inequalities  are  found  some  individuals 
and  families  will  enjoy  large  incomes,  and  out  of  these  incomes 
will  set  aside  for  investment  large  savings,  while  others  will 
accumulate  little  or  nothing.  In  some  families  wealth  and  the 
qualities  necessary  to  its  preservation  will  become  hereditary, 
and  great  fortunes  will  be  passed  on  from  parents  to  children 
through  several  generations.     More  frequently,  if  we  may  judge 


316  ECONOMICS 

from  the  experience  of  the  United  States  up  to  the  present  time, 
the  wealth  accumulated  in  one  generation  will  be  gradually  dis- 
sipated, either  through  division  among  numerous  heirs  or  because 
those  who  inherit  it  lack  either  the  capacity  or  inclination  to 
keep  it  unimpaired. 

Undesirable  as  are  Inequalities  In  wealth,  direct  attempts  to 
limit  wealth  accumulation  would,  in  the  author's  opinion,  be 
productive  of  more  harm  than  good.  A  large  and  growing  fund 
of  capital  is  Indispensable  to  the  maintenance  of  efficient  methods 
of  production  and  no  measures  should  be  adopted  that  are  likely 
to  weaken  seriously  the  motives  to  saving  and  investment.  The 
reasons  for  putting  no  check  on  an  Individual's  right  to  accu- 
mulate wealth  do  not  apply,  however,  to  his  right  to  transmit 
it  at  death  to  his  heirs.  Even  though  hereditary  fortunes  may 
be  dissipated  after  a  few  generations,  It  Is  nevertheless  true  that 
much  of  the  wealth  in  existence  at  any  one  time  has  been  in- 
herited by  those  who  own  it.  Limitations  on  Inheritance  by 
means  of  inheritance  taxes  are,  therefore,  effective  means  of 
lessening  inequalities  in  wealth  among  the  Individuals  in  each 
oncoming  generation. 

Of  all  forms  of  taxation,  Inheritance  taxes  are  believed  to 
be  the  least  objectionable.  They  are  easily  assessed  and  col- 
lected. They  cannot  be  shifted,  but  must  be  paid  out  of  the 
Inheritances  on  which  they  are  intended  to  fall.  Finally,  they 
impose  a  minimum  burden  upon  taxpayers,  since  after  they  are 
established  they  soon  come  to  be  thought  of  as  reasonable  charges 
Imposed  by  the  state  for  Its  services  In  protecting  property  and 
seeing  that  It  passes  into  the  possession  of  the  legal  heirs.  For 
(these  reasons,  as  well  as  because  they  tend  to  lessen  inequalities 
in  wealth,  large  use  should,  In  the  opinion  of  the  author,  be 
made  of  these  taxes  as  sources  of  revenue.  The  experience  of 
other  countries  Indicates  that  the  best  results  are  secured  when 
Inheritance  taxes  are  made  progressive.  Small  inheritances 
should  be  exempt  from  the  tax.  On  larger  Inheritances  the  rate 
of  taxation  should  increase  by  gradual  steps  until  on  large  for- 
tunes it  becomes  a  substantial  deduction,  one-fifth  or  even  one- 
quarter,  from  the  inheritance.     If  the  large  revenues  that  may 


TAXATION  317 

be  derived  from  this  source  are  used  to  advance  the  interests 
of  the  poor  and  thus  lessen  inequahties  in  fortune  at  the  other 
extreme,  steady  progress  may  be  made  toward  a  more  demo- 
cratic distribution  of  wealth  and  welfare. — H.  R.  Seager,  "Eco- 
nomics :  Briefer  Course,"  pp.  458-460. 

260.  Excise  duties. — There  are  two  general  classes  of 
indirect  taxes,  (1)  excise  duties  and  (2)  customs.  Ex- 
cise duties  are  taxes  levied  upon  commodities  destined 
for  consumption.  They  may  be  either  levied  with  the 
primary  intention  of  producing  revenues,  as  in  the  case 
of  the  tobacco  lax,  or  to  regulate  consumption,  as  in  the 
system  of  liquor  licenses. 

The  methods  employed  in  excise  taxation  are  three: 
stamps,  licenses  and  monopoly.  According  to  the  first 
method,  the  tax  is  paid  on  each  unit  of  consumption, 
and  the  payment  of  the  tax  is  attested  by  the  stamp 
certificate.  The  license  is  the  payment  for  the  privilege 
of  sale  of  an  article  which  it  is  desired  to  tax.  The 
privilege  of  selling  liquor  is  generally  obtained  in  this 
way  in  the  United  States.  The  third  method  of  tax- 
ation is  the  method  of  monopoly,  as  illustrated  by  the 
monopoly  of  tobacco  in  France,  and  the  salt  monopoly 
of  India. 

Excise  duties  should  be  levied  upon  as  few  articles 
as  possible.  These  articles  should  be  luxuries  and  arti- 
cles in  great  demand.  They  should  also  be  articles  whose 
processes  of  making  are  simple  and  uniform.  It  is  not 
desirable  to  tax  the  necessities  of  life,  but  a  large  revenue 
can  be  obtained  by  the  tax  on  luxuries.  Furthermore, 
since  excise  taxes  interfere  with  industry,  they  should 
be  limited  as  much  as  possible,  and  should  be  applied  to 
the  smallest  possible  number  of  industries. 

261.  Customs. — Customs  are  taxes  levied  upon  com- 
modities when  they  cross  national  boundary  lines  or  are 


818  ECONOMICS 

admitted  within  a  customs  territory  consisting  of  a 
combination  of  countries,  or  of  different  parts  of  the 
country.  The  purpose  of  customs  duties  is  ( 1 )  revenue, 
and  (2)  the  regulation  of  industry.  A  tax  for  revenue 
should  be  levied  according  to  principles  similar  to  those 
requiring  excise  taxation.  The  tariff  for  revenue  should 
fall  upon  as  few  articles  as  possible.  Luxuries  should  be 
taxed  at  a  higher  rate  than  necessities;  customs  duties 
should  be  imposed  so  as  to  interfere  as  little  as  possible 
with  productive  industries,  and  to  this  end  also  the  tax- 
ation of  raw  materials  should  be  avoided.  The  rate 
of  taxation  should  be  fixed  at  the  point  which  will  pro- 
duce the  largest  revenue  to  the  state,  the  legislator  keep- 
ing in  mind  that  high  prices  diminish  consumption,  and 
low  prices  increase  it.  When  duties  are  levied  upon 
articles  that  are  largely  produced  in  the  country  laying 
the  tax,  excise  taxes  should  also  be  levied  in  order  that 
the  state  may  derive  full  benefit  from  the  tax. 

Customs  duties  may  be  either  specific  or  ad  valorem. 
Specific  duties  are  levied  by  a  fixed  standard,  as  by  the 
yard  or  pound;  ad  valorem  by  the  articles.  Specific 
duties  are  more  easily  and  cheaply  collected,  but  are 
open  to  the  objection  that  they  bear  more  heavily  upon 
the  cheaper  grades  of  articles  which  weigh  as  much  as 
the  more  expensive  varieties.  Ad  valorem  duties,  on  the 
other  hand,  are  open  to  the  objection  that  they  offer 
large  inducement  to  fraudulent  valuation  by  the  im- 
porter. In  practice  specific  duties  are  generally  levied 
on  cheaper,  coarser  articles  and  ad  valorem  duties  on 
the  more  expensive  grades. 

262.  The  ideal  system  of  taxation. — The  ideal  tax 
system  should  maintain  a  proper  balance  between  direct 
and  indirect  taxes.  The  foundation  of  the  tax  system 
should  properly  be  indirect  taxes,  because  these  will 


TAXATION  319 

reach  the  tax-paying  capacity  of  the  majority,  much 
better  than  direct  taxes.  In  addition  to  the  indirect 
taxes,  however,  there  should  be  a  large  element  of  direct 
taxes  in  order  to  levy  the  heaviest  burdens  upon  those 
who  are  most  able  to  pay  high  taxes,  and  in  order  to 
introduce  an  element  of  elasticity  into  the  public 
revenue. 


PART  IV :   ECONOMIC  PROBLEMS 

CHAPTER  I 

RAILROAD  PROBLEM 

263.  Transportation  a  factor  in  our  national  economic 
life. — The  importance  of  transportation  as  a  factor  in 
our  national  economic  life  cannot  be  over-emphasized. 
To  say  that  the  steel  bands  connecting  the  Pacific  with 
the  Atlantic,  the  Gulf  with  the  Lakes,  are  the  great 
arteries  of  the  nation  by  which  its  life  blood  circulates, 
is  no  overdrawn  figure  of  speech.  The  United  States 
as  it  now  exists,  with  its  vast  domains  and  rapidly  de- 
veloping resources,  would  be  an  impossibility  without 
its  great  transportation  system.  It  is  generally  agreed 
that  our  present  civilization  could  not  have  been  attained 
except  through  the  division  of  labor  and  it  is  equally 
true  that  the  principle  of  the  division  of  labor  could 
never  have  been  applied  on  other  than  the  meagerest 
lines  had  it  not  been  for  the  growth  of  transportation. 

264.  Development  of  the  railroad  system. — The  dis- 
cussion in  this  chapter  will  be  on  but  one  form  of 
transportation — ^the  railroad.  It  is  at  present  by  far 
the  most  important  form  and  also  the  only  one  that 
has  given  rise  to  any  serious  problems.  One  cannot 
have  a  comprehensive  grasp  of  the  present  railroad 
problem  without  at  least  a  bird's-eye  view  of  their  past 
development,  as  many  of  the  evils  of  the  railroads 
evolved  out  of  the  nature  of  their  growth.  The  age  of 
the  railroad  was  ushered  in  in  this  countiy  in  1830,  when 

620 


THE  RAILROAD  PROBLEM  321 

the  first  railroad — the  Baltimore  and  Ohio — was  opened 
for  traffic.  During  the  next  decade  the  railroads  were 
short  local  lines.  During  the  period  1840  to  1870  many- 
new  roads  were  built  and  the  process  of  "linear  con- 
solidation"— the  linking  together  of  local  companies  into 
through  trunk  hnes — began.  Before  the  close  of  this 
period,  the  New  York  Central  and  the  Pennsylvania 
had  effected  through  connections  with  Chicago.  The 
Central  and  Union  Pacific  railways  had  connected  the 
eastern  roads  with  the  Pacific  Ocean. 

The  next  period  is  that  between  1870  and  1890,  when 
there  was  an  unparalleled  expansion  of  the  railway 
mileage  of  the  country  from  52,000  to  160,000  miles, 
more  than  200  per  cent.  In  this  period  new  routes  were 
completed  between  the  Atlantic  seaboard  and  Chicago 
which  resulted  in  a  period  of  destructive  competition 
which  in  turn  led  to  discriminations  and  rebating  in 
through  traffic  and  the  overcharging  of  local  noncom- 
petitive traffic — ^two  evils  later  to  be  dealt  with  by  law. 
The  railroads  in  this  early  stage  sought  to  restrain 
competition  by  the  creation  of  pools  and  traffic  agree- 
ments which  also  later  became  the  subject  of  legislation. 

The  last  period  of  railroad  history,  1890  to  the  present 
time,  has  been  characterized  by  an  unprecedented 
amount  of  consolidation  and  combination  among  com- 
peting roads,  until  a  number  of  men  small  enough  to 
sit  about  a  common  table  control  the  administrative 
machinery  of  the  railway  system  of  America — a  system 
greater  in  extent  than  all  the  railways  of  Europe  com- 
bined. 

265.  TJie  railroad  a  form  of  monopoly. — One  cannot 
understand  the  real  nature  of  the  railroad  problem  un- 
less he  keeps  two  points  clearly  in  mind.  First,  that  the 
railroad  by  the  nature  of  its  organization  is  a  form  of 

1-21 


322  ECONOMICS 

monopoly  and  must  always  be  recognized  as  such,  and 
second,  that  selling  transportation  is  not  the  same  as 
selling  ordinary  commodities. 

The  railroad  is  a  monopoly  in  the  sense  that  it  is  a 
business  of  "diminishing  expense."  Its  expense  of  op- 
eration materially  decreases  with  its  growth  in  business. 
Every  railroad  requires  a  large  initial  outlay  of  capital 
for  roadbed,  terminal  facilities,  rolhng  stock  and  the 
like.  These  expenditures  must  be  made  regardless  of 
the  volume  of  its  traffic.  For  every  additional  hundred- 
weight of  freight  carried,  the  pro  rata  expense  is  re- 
duced. Such  being  the  case,  one  can  at  least  understand 
the  motive  which  prompts  the  railroad  traffic  managers 
to  go  after  additional  freight  at  lower  rates  than  those 
customary,  or  to  offer  lower  rates  to  the  large  shipper 
than  to  the  small.  He  is  merely  applying  a  practice 
common  to  all  the  business  world. 

266.  The  railroad  is  quasi-public  in  nature. — This 
leads  to  the  second  point  which  one  must  keep  in  mind, 
viz. :  that  selling  transportation  differs  from  selling  or- 
dinary commodities.  Two  reasons  explain  the  differ- 
ence: first,  the  fact  that  the  railroad  corporation  has 
always  stood  in  a  different  relation  to  the  state  from 
that  of  ordinary  business  corporations ;  and  second,  the 
fact  that  public  welfare  compels  us  to  view  railroading 
in  a  different  light  from  other  economic  activities. 

A  word  is  necessary  to  make  clear  each  of  these  rea- 
sons. The  state  has  always  fostered  railroad  building. 
Constantly  the  state  delegates  to  railroad  corporations 
its  own  immemorial  right  of  "eminent  domain."  If  the 
state  had  not  freely  conferred  this  right  on  railroad 
corporations,  the  present  American  transportation  sys- 
tem would  have  been  an  impossibility.  Moreover, 
American  railroads  from  the  earliest  times  have  received 


THE  RAILROAD  PROBLEM  323 

state  aid  in  regard  to  their  finances.  There  are  no  less 
than  nineteen  states  which  have  advanced  funds  of  con- 
siderable amounts  for  railroad  construction.  Some  of 
them  contracted  debts  amounting  to  no  less  than  $30,- 
000,000  for  the  benefit  of  various  railroads.  In  addi- 
tion, the  national  government  has  from  time  to  time 
made  large  grants  of  land  from  the  public  domain 
amounting  in  all  to  no  less  than  100,000,000  acres  of 
land.  There  is  no  parallel  to  this  degree  of  state  aid  in 
any  of  the  other  economic  activities  of  the  people. 

Aside  from  this  state  aid  aspect  of  the  subject,  the  su- 
preme necessity  for  national  welfare  and  common  justice 
make  it  impossible  to  accept  any  other  theory  than  that 
railroading,  unlike  ordinary  business,  is  peculiarly  amen- 
able to  public  regulation.  The  necessity  of  the  case  pre- 
vents us  from  allowing  the  railroad  to  sell  its  product  as 
it  chooses.  Such  a  theory  would  place  in  the  hands  of  a 
few  private  citizens  almost  absolute  control  of  com- 
merce, give  them  a  taxing  power  over  the  public,  equal 
to,  if  not  in  excess  of,  the  taxing  power  of  the  govern- 
ment itself,  and  would  allow  a  group  of  individuals, 
through  this  power,  the  opportunity  to  say  which  sections 
of  the  country  shall  prosper  and  which  shall  not,  which 
individuals  shall  be  allowed  to  amass  fortunes  and  which 
shall  be  doomed  to  poverty.  To  escape  from  the  evils 
of  such  a  condition  the  state  imposes  on  the  railroad  two 
broad  restrictions  which  do  not  apply  to  business  of 
a  strictly  private  nature.  First,  charges  (rates)  must 
be  reasonable;  and  second,  the  railroads  shall  be  open 
to  all  persons,  whether  they  be  large  or  small  dealers, 
on  equal  terms. 

267.  The  problem  of  discrimination. — The  problem 
of  discrimination  includes  some  of  the  most  serious 
phases  of  the  general  railroad  problem.      Outside  of 


324  ECONOMICS 

the  question  of  whether  the  traffic  manager  is  willfully 
violating  the  law,  the  adjustment  of  rates  between  com- 
modities and  between  places  is  a  problem  of  no  small 
magnitude  and  one  which  requires  nothing  less  than 
expert  knowledge  to  solve.  Discriminations  may  be  of 
three  kinds,  viz.:  between  persons,  between  places  and 
between  commodities.  A  discrimination  between  per- 
sons occurs  when  one  shipper  gets  some  special  privilege 
not  afforded  to  his  competitor.  It  may  be  in  the  form 
of  secretly  low  rates,  direct  rebates,  or  in  the  ability  to 
get  all  the  cars  wanted,  while  his  competitor  is  denied 
them  on  one  pretext  or  another.  Whatever  the  plan, 
it  is  a  form  of  special  privilege  and  inevitably  results 
in  the  failure  of  the  man  discriminated  against.  Com- 
petition is  so  keen  in  business  to-day  that  no  man  can 
long  compete  against  one  who  can  get  his  goods  to 
market  more  cheaply.  To  make  the  situation  more 
grave,  the  man  discriminated  against  is  usually  the  small 
shipper,  the  one,  if  any,  who  can  least  afford  to  pay 
the  higher  rate. 

Discrimination  between  places  is  a  problem  which  is 
constantly  arising.  In  many  ways  its  effects  are  more 
far-reaching  than  the  class  of  discriminations  just  dis- 
cussed. Two  cities  or  two  districts  may  be  producers 
of  similar  products  which  are  sold  in  competition  in 
one  market.  A  rate  discriminating  in  favor  of  the  one 
district  means  that  it  shall  prosper  and  gain  control 
of  the  market  in  question.  Its  merchants  will  grow 
wealthy  while  those  of  its  rivals  languish  and  their 
business  dwindles.  A  case  at  issue  at  the  present  time 
is  that  of  the  respective  cement  rates  obtained  by  Jersey 
City  and  Philadelphia  on  cement  coming  from  the 
Northampton  district.  Jersey  City  enjoys  a  rate  of 
eighty  cents  per  ton  of  two  thousand  pounds.     The  rate 


THE  RAILROAD  PROBLEM  325 

to  Philadelphia  is  $1.35  per  ton  in  car  loads  of  fifty- 
thousand  pounds  minimum  per  car  except  when  the 
capacity  of  the  car  is  less,  when  the  actual  capacity 
governs.  Under  this  system  of  rates  Philadelphia's  ex- 
port trade  in  cement  steadily  dwindled,  until  the  rec- 
ord for  1907  was  two  barrels.  It  is  not  to  be  expected 
that  there  can  be  any  large  development  of  an  ex- 
port or  coastwise  shipment  of  cement  from  Philadel- 
phia until  that  port  is  given  as  low  a  rate  and  as  favor- 
able a  service  as  is  granted  to  the  railroad  terminals 
on  the  west  side  of  the  Hudson  River. 

Hardly  less  important  than  the  type  of  discrimina- 
tions just  discussed  is  that  which  may  exist  in  the  rates 
charged  different  groups  of  commodities.  The  differ- 
ence between  the  rates  on  flour  and  wheat  may  be  such 
as  to  change  the  location  of  the  milling  industry  from 
the  West  to  the  East,  as  would  be  the  case  if  the  rates 
on  flour  coming  from  ISIinneapolis  were  made  so  high 
in  proportion  to  the  rate  on  wheat,  that  the  Minneapolis 
millers  could  not  send  their  flour  east,  for  it  could  no 
longer  compete  with  wheat  shipped  east  at  dispropor- 
tionately low  rates  and  then  milled  in  the  East.  As 
a  rule,  it  is  to  the  interest  of  the  traffic  manager  to 
arrange  his  rates  so  as  to  get  all  that  "the  traffic  will 
bear,"  but  this  may  work  a  hardship  on  many  shippers. 

268.  History  of  railroad  legislation. — Such  being  the 
nature  of  the  railroad  business  with  its  resulting  enor- 
mous power,  it  is  not  at  all  surprising  that  steps  should 
early  have  been  taken  by  the  government  to  insure  to 
its  citizens  the  management  of  the  railroads  in  the  in- 
terests of  all  its  shippers  regardless  of  size  or  location. 
At  first  the  individual  states  passed  laws  to  insure  such 
treatment  to  their  respective  citizens  but  because  of  the 
magnitude  of  the  problem  and  also  because  of  lack  of 


326  ECONOMICS 

uniformity  of  action,  the  states  were  able  to  do  little 
that  was  really  effective.  The  agitation  did,  however, 
call  the  attention  of  the  public  in  a  forcible  manner  to 
the  nature  of  the  problem  involved  and  so  paved  the  way 
for  federal  action  which  was  made  possible  by  the  clause 
in  the  United  States  Constitution  which  gives  Congress 
power  to  regulate  interstate  commerce.  The  lesson 
which  had  to  be  learned  before  control  was  possible  was 
that  private  competition  among  railroads  cannot  be 
trusted  to  correct  railroad  abuses  and  that,  therefore, 
public  regulation  must  be  substituted.  The  monopoly 
nature  of  railroading  had  first  to  be  firmly  impressed 
on  public  opinion.  People  had  to  see  that,  granted  com- 
petition could  regulate  railroad  abuses,  it  was  at  best  a 
blundering  and  expensive  system  of  setting  matters 
right.  It  is  a  great  economic  waste  to  have  two  railroad 
lines  duplicating  work  which  can  be  handled  by  one 
system.  From  a  social  point  of  view,  such  an  expendi- 
ture of  capital  is  uneconomical  and  therefore  unjusti- 
fiable. 

269.  Interstate  Commerce  Act  of  1887. — As  a  final 
outcome  Congress  passed  the  Interstate  Commerce 
Act  in  1887.  It  was  the  result  of  the  best  knowledge 
then  available  of  the  subject.  Experience  soon  proved 
the  first  act  of  Congress  weak  in  parts.  As  a  result, 
several  supplemental  acts,  framed  in  the  light  of  the  ex- 
perience gleaned  by  the  Interstate  Commerce  Commis- 
sion in  its  ceaseless  endeavors  to  secure  justice  in  railroad 
affairs,  have  since  been  passed.  Although  the  present 
combination  of  laws  governing  railroads  is  not  perfect, 
they  have  wrought  a  marked  improvement  over  condi- 
tions existing  prior  to  1887. 

The  first  federal  measure  covered  in  the  main  five 
important  points.     First,  unreasonable  and  extortionate 


THE  RAILROAD  PROBLEM  S27 

rates  were  prohibited.  Second,  discriminations  between 
persons,  places  and  commodities  were  prohibited.  Rail- 
road officials  making  such  discriminations  were  liable 
to  fine  and  imprisonment.  Third,  all  fares  and  rates 
were  required  to  be  printed  and  made  public  and  also 
filed  with  the  Commissioner.  Fourth,  it  is  unlawful  for 
any  common  carrier  subject  to  the  provisions  of  this 
act  to  charge  or  receive  any  greater  compensation  in 
the  aggregate  for  the  transportation  of  passengers  or 
of  like  kinds  of  property,  under  substantially  similar 
circumstances  and  conditions,  for  a  shorter  than  for  a 
longer  distance  over  the  same  line,  in  the  same  direction, 
the  shorter  being  included  in  the  longer  distance.  The 
Commission  was  empowered  to  suspend  this  "long  and 
short  haul  clause,"  as  it  is  popularly  known,  whenever  it 
deemed  fit.  Fifth,  all  pooling  contracts  between  rail- 
roads were  prohibited.  A  commission  of  experts  ap- 
pointed by  the  President  of  the  United  States  is 
empowered  to  carry  out  the  provisions  of  the  law.  For 
this  purpose  the  Commission  has  power  to  make  investi- 
gations, to  go  over  the  books  and  papers  of  a  carrier, 
and  to  compel  testimony.  An  investigation  may  be 
made  upon  the  complaint  of  a  shipper  seeking  redress 
for  damages  or  at  the  will  of  the  Commission  itself. 
If  the  Commission  decides  that  the  law  is  being  violated, 
it  may  order  the  carrier  to  stop  its  illegal  practices  and 
award  damages  to  those  who  have  suffered  because  of 
the  said  violations.  These  orders  of  the  Commission  are 
not  binding,  should  the  carrier  against  whom  they  are 
made,  care  to  disregard  them.  The  Commission  in  such 
cases  must  appeal  to  the  District  Courts  of  the  United 
States  to  enforce  the  order  if  they  see  fit. 

270.  Elki7is  Law  of  1903.— In  1903  the  Act  of  1887 
was  amended  by  the  Elkins  Law.     This  appreciably 


S28  ECONOMICS 

strengthened  the  government's  control  of  the  rail- 
road. Among  other  things  it  makes  the  corporation, 
as  well  as  the  agent  or  officer,  liable  to  prosecution  for 
violation  of  the  law  and  hastens  the  wheels  of  justice  by 
causing  an  appeal  from  the  final  decree  of  the  District 
Court  to  lie  only  to  the  Supreme  Court  and  such  appeal 
must  be  taken  within  sixty  days  from  the  entry  thereof. 

271.  Hepburn  Act  of  1906. — In  1906  Congress  fur- 
ther extended  the  commissioners'  authority  by  em- 
powering them  to  fix  a  maximum  rate  instead  of,  as 
formerly,  to  declare  a  certain  rate  unreasonable  and 
there  let  it  rest.  The  act  further  empowered  the  Inter- 
state Commerce  Commission  to  require  uniform  ac- 
counting of  all  railroads  under  its  jurisdiction.  As  a 
result  the  business  of  railroading  has  in  a  large  measure 
ceased  to  be  private,  and  has  become  open  and  public. 
tThus  the  old  problem  of  private  competition  versus  pub- 
lic regulation  has  been  solved.  In  its  place  stands 
the  new  problem  of  public  regulation  versus  public 
ownership. 

272.  Public  regulation  versus  public  ownership. — 
Thus  far  the  Interstate  Commerce  Commission  has 
been  denied  the  general  power  to  fix  rates.  Many  feel 
that  under  these  conditions  we  must  face  the  alternative 
of  letting  the  railroads  charge  pretty  much  what  they 
please  or  of  adopting  government  ownership,  and  argue 
that  if  such  could  be  accomplished,  the  aim  of  the  railroad 
would  be  better  service  instead  of  profits.  They  further 
contend  for  their  side  of  the  case,  that  personal  dis- 
criminations would  cease,  that  railway  interests  would 
be  eliminated  from  politics  and  that  the  unearned  incre- 
ment of  railroad  values  would  accrue  to  society.  Many 
also  feel  that  were  the  American  railroads  nationalized, 
the  abnormally  high  death  and  accident  rate  that  now 


THE  RAILROAD  PROBLEM  329 

obtains,  could  be  considerably  lowered.  The  desire  for 
profits  would  no  longer  prevent  the  installation  of  the 
best  safety  devices  known  to  modern  railroading.  The 
important  arguments  in  favor  of  private  operation  are: 
(1)  efficiency  in  management;  (2)  greater  elasticity  in 
meeting  the  varying  demands  of  business;  (3)  the  dan- 
ger in  government  operation  of  throwing  sectional  dis- 
putes as  to  rates  into  politics.  Whatever  shall  be  the 
ultimate  outcome  of  the  problem  in  America,  it  is  certain 
that  for  some  time  at  least  we  are  going  to  make  a  more 
thorough  experiment  with  private  operation  under  gov- 
ernment regulation  before  we  pronounce  it  a  failure  and 
adopt  the  only  remaining  course — government  owner- 
ship of  the  railroads. 

Important  as  is  the  abolition  of  discrimination  in  rates,  it 
cannot  be  accepted  as  a  complete  solution  of  the  railroad  prob- 
lem. According  to  our  analysis  railroads  are  in  a  high  degree 
monopolistic.  As  the  country  becomes  more  densely  populated 
and  the  volume  of  traffic  grows,  the  earnings  of  old,  established 
railroads  should  show  a  marked  tendency  upward.  Unless  their 
charges  are  regulated  by  administrative  decree,  they  are  likely 
to  become  increasingly  unjust  and  unreasonable  and  to  afford 
larger  and  larger  monopoly  profits.  But  if  the  Interstate  Com- 
merce Commission  is  to  accomplish  its  task  of  seeing  to  it  that 
railroad  rates  are  just  and  reasonable,  not  merely  among  them- 
selves, or  relatively,  but  absolutely,  it  must  have  at  its  command 
all  the  data  necessary  for  distinguishing  the  reasonable  from 
the  unreasonable.  The  meaning  usually  attached  to  the  phrase, 
"just  and  reasonable,"  in  connection  with  charges  is  that  they 
shall  afford  a  just  and  reasonable  return  on  the  investment.  It 
would  be  impossible  at  this  late  date  to  determine  what  the  origi- 
nal investment  in  railroad  property  in  the  United  States  actually 
was.  The  most  that  can  be  expected  is  that  the  Commission 
shall  be  enabled  to  make  a  fair  estimate  of  the  present  value 
of  the  investment  on  which  holders  of  railroad  securities  are  en- 


330  ECONOMICS 

titled  to  a  return  and  that  it  shall  have  some  measure  of  control 
over  the  relation  between  investment  and  capitalization  in  the 
future.  The  first  step  that  is  currently  advocated  as  a  means  to 
insuring  just  and  reasonable  railroad  rates  is  the  valuation  of 
the  physical  property  of  the  railroads  of  the  country.  Al- 
though this  proposal  is  bitterly  opposed  by  railroad  managers, 
it  can  hardly  be  denied  that  it  follows  logically  from  the  policy 
of  rate  regulation  by  Commission  to  which  the  Federal  Govern- 
ment is  now  fully  committed.  Nor  is  there  any  good  ground 
for  believing  that  the  carrying  out  of  such  a  proposal  would  be 
disadvantageous  to  investors  in  railroad  securities.  Most  of 
the  great  railroad  systems  of  the  country  are  now  conservatively 
capitalized  since  the  correspondence  between  tangible  assets  and 
capital  liabilities,  which  was  so  often  conspicuously  absent  at 
the  outset,  has  since  been  brought  about  either  by  failure  and 
reorganization,  or  by  an  appreciation  in  the  value  of  certain 
assets,  particularly  real  estate.  In  addition  to  directing  the 
Interstate  Commerce  Commission  to  make  an  inventory  of  the 
property  of  the  railroads,  Congress  must  also  empower  that 
body  to  control  future  issues  of  capital  stock  and  thus  to  deter- 
mine in  the  future  the  capital  invested  on  which  a  return  may 
be  justly  and  reasonably  claimed  by  investors.  Without  such 
power,  the  Commission  clearly  cannot  carry  out  the  task  which 
the  law  has  all  along  imposed  upon  it,  that  is,  to  see  to  it  that 
only  just  and  reasonable  rates  are  charged. 

At  the  same  time  that  regulation  of  the  railroad  industry  is 
advanced  this  further  step,  a  concession  should  be  made  to  rail- 
road managers  which  they  would  greatly  appreciate.  In  its 
amended  form  the  Interstate  Commerce  Act  leaves  no  doubt  that 
Congress  recognizes  the  failure  of  competition  to  regulate 
railroad  rates  in  the  public  interest  and  proposes  to  secure  such 
regulation  through  the  Interstate  Commerce  Commission.  Un- 
der these  circumstances  there  is  no  longer  any  justification  for 
the  sweeping  prohibition  in  the  present  law  of  agreements  as  to 
rates,  pooling  arrangements,  etc.  Not  only  the  logic  but  the 
practical  exigencies  of  the  situation  demand  that  the  Commis- 
sion be  empowered  to   authorize  such  agreements   among  the 


THE  RAILROAD  PROBLEM  331 

railroads  as  are  not  opposed  to  the  public  interest  and  that  agree- 
ments so  authorized  have  the  force  of  legally  binding  contracts. 
Such  a  change  would  facilitate  a  more  economical  and  stable 
organization  of  the  railway  business  and  also  lessen  the  tempta- 
tion to  discrimination.  In  the  opinion  of  the  writer  these  two 
important  extensions  of  the  regulative  policy  should  be  made 
as  promptly  as  possible,  for  only  in  this  way  can  this  method 
of  solving  the  railroad  problem  be  given  a  fair  trial.  Then, 
to  repeat  the  words  of  Judge  Knapp,  Chairman  of  the  Inter- 
state Commerce  Commisson,  "If  regulation  fails,  public  owner- 
ship will  be  the  next  and  early  resort." — H.  R.  Seager,  "Eco- 
nomics :  Briefer  Course,"  pp.  392-4. 


CHAPTER  II 

TARIFF  PROBLEM 

273.  Basis  of  international  trade. — We  have  now  to 
consider  the  question  of  the  protective  tariff.  In  order 
to  discuss  this  question  intelHgently,  we  must  first  un- 
derstand the  nature  and  objects  of  foreign  trade. 
England  produces  cheap  iron  and  coal;  India,  cotton 
and  silk  at  a  low  cost  of  production.  England  could 
grow  cotton  and  silk  in  greenhouses  at  enormous  ex- 
pense; India  could  produce  iron  and  coal  at  great  cost 
and  with  much  difficulty.  It  is  obvious,  however,  that 
each  country  should  devote  itself  to  the  production  of 
those  things  which  it  is  best  suited  by  nature  to 
produce,  exchanging  for  them  such  products  of  other 
countries  as  it  requires.  The  permanent  basis  of  in- 
ternational trade  is  differences  in  resources  and  produc- 
tions of  different  countries.  The  most  important  of 
these  differences  is  that  which  exists  between  the  tropical 
and  the  temperate  zones.  The  United  States,  for  ex- 
ample, obtains  from  the  tropical  zone  almost  all  of  her 
sugar,  all  of  her  coffee,  tea,  a  large  amount  of  tropical 
fruits,  rubber,  cocoa,  spices,  tropical  woods  and  a  great 
variety  of  other  commodities.  Most  of  these  could  be 
produced  in  the  United  States,  and  some  of  them  are 
produced  here.  It  is,  however,  more  economical  for 
the  United  States  to  devote  the  major  part  of  her  en- 
ergy to  the  production  of  lumber,  iron,  steel,  coal,  flour 
and  wheat  products,  and  cotton  which  she  can  produce 
at  low  cost  and  in  large  quantities,  and  to  use  these 

S32 


I 


THE  TARIFF  PROBLEM  333 

to  purchase  the  tropical  products  which  she  may  need. 
In  addition  to  the  climatical  differences  in  the  pro- 
ductions of  the  different  countries,  there  are  other  dif- 
ferences existing  between  countries  located  in  the  same 
latitude.  Examples  of  this  difference  are  furnished  by 
comparison  of  England  and  the  United  States.  These 
countries  have  much  the  same  climate,  and  they  have 
in  general  the  same  industries.  In  most  of  these  indus- 
tries, however,  England  can  produce  at  lower  cost  than 
the  United  States.  The  English  woolen  mills  com- 
pared with  those  of  the  United  States  are  favored  with 
lower  wages,  greater  technical  skill  and  cheaper  wool. 
Consequently  the  English  cost  of  production  of  woolens 
is  much  lower  than  the  cost  to  the  United  States.  Eng- 
land can  produce  goods  at  Bradford,  pay  ocean  rates  to 
New  York,  freight  to  Chicago,  and  still  undersell  Amer- 
ican competitors.  The  same  is  true  in  glass,  cotton, 
pottery  and  a  variety  of  other  industries.  England  and 
the  other  manufacturing  nations  of  Northern  Europe 
excel  the  United  States,  generally  speaking,  in  all  those 
branches  of  production  where  skillful  manufacturing 
labor  is  required  and  where  wages  form  a  large  element 
in  the  cost  of  production.  The  United  States,  on  the 
other  hand,  can  hold  her  own  in  those  industries  where 
in  other  countries  the  price  of  labor  and  the  large  use  of 
machines  is  important.  Industries  in  which  England 
naturally  excels,  however,  have  been  made  to  flourish 
in  the  United  States  by  our  protective  tariff.  With- 
out this  artificial  aid  many  of  these  enterprises 
would  not  now  be  carried  on  in  this  country.  The  ques- 
tion is  often  raised,  however :  granted  that  we  now  have 
these ,  industries  as  a  result  of  protection,  have  we  not 
paid  too  high  a  price  for  them?  This  is  the  real  point 
at  issue  between  the  Protectionist  and  the  Free  Trader. 


334  ECONOMICS 

274.  Protective  tariff^  defined. — There  are  two  types 
of  tariff,  known  respectively  as  a  "tariff  for  revenue 
only"  and  a  "protective  tariff."  The  sole  object  of  the 
former  is  to  raise  revenue  for  carrying  on  the  govern- 
ment. Accordingly  articles  are  taxed  regardless  of  the 
question  of  aiding  home  industries.  Thus  England  lays 
a  tax  on  coffee  and  tea,  though  neither  can  be  grown 
there.  The  prime  object  of  a  protective  tariff,  on  the 
other  hand,  is  to  tax  only  those  articles  which  come  into 
competition  with  home  products.  In  the  "tariff  for 
revenue  only"  the  rate  of  tax  is  fixed  solely  with  refer- 
ence to  the  amount  of  money  needed  for  government 
expenditures.  In  the  protective  tariff  a  different  prin- 
ciple obtains  in  determining  the  rate  of  duty,  namely, 
the  relative  costs  of  production  in  different  countries. 
Thus  if  it  costs  a  third  less  to  weave  woolen  cloth  in 
England  due  to  a  cheaper  labor  cost,  cheaper  wool,  etc., 
the  rate  of  duty  imposed  by  the  American  tariff  would 
be  at  least  50  per  cent. 

275.  Operation  of  a  protective  tariff. — A  protective 
tariff  operates  by  raising  the  price  of  the  foreign  article 
to  such  a  height  that  the  domestic  product  can  success- 
fully compete  with  it.  If  the  rate  is  so  high  as  practically 
to  exclude  all  foreign  importation,  no  revenue  goes  to  the 
government,  but  the  domestic  consumer  pays  a  tax  to  the 
domestic  manufacturer  equal  to  the  difference  between 
the  cost  of  the  foreign  product  laid  down  in  America 
and  the  selling  price  of  the  American  product.  In 
other  words,  the  American  producer  gets  all  of  the  tax. 
If  the  tariff  wall  is  not  so  high  as  to  exclude  all  foreign 
competition,  then  the  government  receives  the  duty. 
Under  the  condition  that  we  are  the  chief  market  of  a 
foreign  producer  he  must  bear  the  tax  in  order  to  enter 
the  American  market.     If  not,  the  tax  is  borne  by  the 


THE  TARIFF  PROBLEM  335 

American  importer,  i.  e.,  ultimately  by  the  American 
consumer. 

276.  Theory  of  protection. — Protectionists  admit  that 
for  the  time  being  while  the  industry  is  being  established 
the  tariff  operates  as  a  tax  on  the  consumer  of  the  pro- 
tected article.  They  hold,  however,  that  this  is  merely 
a  payment  for  benefits  which  will  flow  from  the  general 
prosperity  of  a  nation  which  diversifies  its  industries 
and  develops  its  resources. 

But  it  may  be  urged,  why  need  a  country  employ 
artificial  means  to  diversify  its  industries?  If  the 
natural  basis  for  those  industries  exist  they  will  de- 
velop themselves.  This,  however,  is  a  false  assumption. 
If  an  industry  gets  an  early  start  in  a  given  countiy 
or  district,  that  country  or  locality  is  likely  to  retain 
its  advantages  because  of  the  concentration  there  of 
capital  and  labor  with  the  requirements  and  possibilities 
of  the  industry.  JMany  industries  are  located  at  cer- 
tain places  solely  because  of  "the  momentum  acquired 
by  an  early  start."  In  the  early  stages  of  an  industry, 
the  tariff  acts  as  a  stimulus,  protecting  the  domestic 
producer  from  foreign  competition.  Protection  may 
be  accepted  on  sound  economic  grounds  in  all  countries 
in  a  young  and  dynamic  condition  which  desire  to  de- 
velop their  resources  and  diversify  their  industries. 
We  can,  therefore,  justify  the  attitude  of  the  country 
that  taxes  itself  at  an  early  date  for  the  sake  of  testing 
and  developing  the  latent  aptitudes  of  its  land  and  its 
people.  At  the  outset  it  will  thereby  sustain  a  loss, 
because  in  the  beginning  it  can  make  a  greater  gain 
by  paying  for  its  purchases  with  money,  than  it  could  if 
paying  for  them  in  goods  produced;  but  there  may 
easily  come  a  time  when  it  can  gain  more  by  the  direct 
method.    If  we  learn  to  make  things  more  economically 


336  ECONOMICS 

than  we  could  originally  make  them,  if  we  hit  upon 
cheap  sources  of  motive  power  and  of  raw  material,  and 
especially  if  we  devise  machinery  that  works  rapidly 
and  accurately  and  greatly  multiplies  the  product  of  a 
man's  working  day,  we  shall  reach  a  condition  in  which, 
instead  of  a  loss  incidental  to  the  early  years  of  manu- 
facturing, we  shall  have  an  increasing  gain  that  will  con- 
tinue to  the  end  of  time.  It  may  be  further  stated  that 
without  protection  and  the  burdensome  tax  which  it  did 
undoubtedly  impose  upon  us,  we  should  have  had  to 
wait  far  too  long  for  this  gain  to  accrue  and  should  have 
sacrificed  the  benefits  that  come  from  a  long  interval  of 
diversified  and  fruitful  industry. 

Professor  Seager  thus  summarizes  the  argument  for 
free  trade: 

The  same  reasons  that  make  free  exchange  within  a  country 
advantageous  may  be  urged  in  favor  of  free  trade  among  coun- 
tries. Political  boundaries  do  not  alter  the  essential  facts  that 
trade  is  at  bottom  an  exchange  of  goods  for  goods  in  which 
both  parties  are  gainers,  and  that  the  freer  the  conditions  of 
exchange  the  more  highly  will  the  division  of  labor  be  devel- 
oped. Differences  in  the  productive  capacities  of  different 
countries  fit  some  to  produce  some  things,  others,  others.  If 
free  trade  be  permitted,  each  will  tend  to  produce  only  those 
things  for  which  it  is  best  adapted  and  to  rely  upon  other  coun- 
tries for  the  other  things  desired  and  in  the  production  of  which 
the  latter  have  a  relative  advantage.  The  consequence  will  be 
a  larger  joint  produce  and  a  larger  share  of  wealth  for  each 
country  than  it  could  secure  if  compelled  to  produce  for  itself 
all  of  the  things  that  its  inhabitants  require.  If  restrictions 
on  trade  are  to  be  approved,  it  must  be  because  they  accomplish 
results  that  compensate  a  country  for  the  undoubted  losses 
which  they  entail. — H.  R.  Seager,  "Economics :  Briefer  Course^'* 
p.  291. 


THE  TARIFF  PROBLEM  337 

Professor  Bullock  illustrates  the  argument  as  fol- 
lows: 

The  immediate  effect  of  establishing,  by  a  protective  duty, 
an  industry  that  would  not  have  been  profitable  otherwise,  is  to 
attract  into  a  less  productive  industry  capital  that  would  have 
been  invested  in  more  productive  channels.  What  is  it  that 
makes  it  possible  for  some  American  producers  of  wheat,  com, 
cattle,  iron  and  steel  products,  cotton  and  cotton  goods,  leather, 
boots  and  shoes,  tobacco,  and  oils  to  sell  their  products  in  for- 
eign countries  at  prices  that  enable  them  to  compete  with  any 
producers  in  the  world,  while  other  American  producers  cannot 
do  so?  Simply  the  fact  that  the  first  class  of  producers  enjoys 
exceptional  facilities.  A  protective  duty  upon  articles  that  we 
cannot  as  yet  produce  as  cheaply  as  certain  foreign  producers, 
simply  invites  capital  away  from  industries  where  we  have  un- 
paralleled advantages  into  industries  where  our  facilities  are 
not  so  good.  Its  immediate  effect,  therefore,  must  be  to  decrease 
the  productivity  of  the  capital  invested  in  the  protected  indus- 
try', and  to  cause  economic  loss. 

But  it  may  happen  that  the  industry  established  by  the  pro- 
tective duty  will  prove  to  be  one  for  which  our  producers  have 
first-rate  facilities.  Inexperience  or  other  initial  difficulties  may 
have  been  the  only  causes  that  prevented  capitalists  from  mak- 
ing a  profit  by  producing  the  product  at  the  price  of  one  dollar. 
It  may  happen  that,  in  a  few  years,  the  domestic  producers  can 
overcome  these  difficulties,  and  make  a  profit  by  selling  the  com- 
modity at  as  low  a  price  as  the  foreign  producers.  When  this 
occurs,  the  industry  would  prove  self-sustaining  if  the  duty  were 
removed ;  and  it  would  become  a  more  profitable  instead  of  a  less 
profitable  industry.  Then  the  economic  loss  would  cease,  and 
the  ultimate  result  of  the  protective  duty  would  have  been  to 
hasten  the  establishment  of  the  industry.  The  word  hasten  is 
italicized  because  such  an  industry  would  be  one  for  which  the 
country  had  good  advantages — one  which  would  have  been 
quite  sure  to  be  established  without  protection,  as  the  labor  and 
capital  force  of  the  country  increased.  Protective  duties  may 
1—22 


J 


338  ECONOMICS 

hasten  the  growth  of  such  enterprises;  but  the  economist  must 
insist  that  they  cause  a  less  productive  use  of  capital,  hence  an 
economic  waste,  until  the  industry  becomes  self-supporting. 
Then  the  duty  should  be  removed,  and  the  economic  waste  would 
cease. 

It  is  possible  that  experience  under  a  protective  duty  may 
show  that  the  protected  industry  does  not  enjoy  such  great  ad- 
vantages that  producers  can  afford  to  sell  at  the  prices  charged 
by  foreigners  (in  this  assumed  case,  one  dollar).  This  is  merely 
a  demonstration  that  the  industry  does  not  enjoy  such  superior- 
ity over  foreign  producers  as  other  industries  of  the  country 
possess.  A  protected  industry  that  does  not  become  self-sup- 
porting causes  a  permanent  economic  waste.  The  labor  and 
capital  invested  in  it  could  have  been  employed  more  profitably 
in  some  other  industry. 

277.  The  evils  of  "dumping.'* — One  of  the  strongest 
arguments  in  favor  of  protection  is  that  it  prevents 
"dumping."  By  dumping  is  meant  the  sale  of  prod- 
ucts abroad  at  prices  lower  than  those  charged  at  home. 
Dumping  arises  in  a  number  of  ways.  Export  bounties 
may  be  granted  by  the  home  country  for  the  specific 
purpose  of  encouraging  foreign  trade;  or  a  monopoly 
may  find  it  profitable  to  dispose  of  a  surplus  abroad  at 
prices  which  would  be  needlessly  low  in  the  highly  pro- 
tected home  market;  and  indeed,  there  is  good  reason 
to  believe  that  many  manufacturers  for  the  export  trade 
make  it  a  practice  to  sell  abroad  at  unusually  low  prices 
whenever  they  believe  that  their  foreign  market  is 
threatened.  Dumping  is  never  permanent.  So  far  as 
it  may  be  said  to  have  a  rational  object  it  aims  to  sup- 
press competing  industries  by  selling  temporarily  below 
cost;  and  when  those  industries  are  forced  out  of  busi- 
ness, prices  will  be  raised.  An  interesting  illustration 
of  this  policy  is  afforded  as  early  as  1813,  when  the 
English  manufacturers  in  order  to  crush  out  American 


THE  TARIFF  PROBLEM  339 

industries  and  to  regain  their  lost  market  sent  to 
America  shiploads  of  goods  on  most  liberal  terms  in 
order  to  crush  out  the  developing  industries  of  America; 
for  in  the  words  of  a  prominent  English  statesman  of 
the  time,  "It  is  well  worth  while  to  incur  a  loss 
upon  the  first  exportation,  in  order  by  the  glut  to  stifle 
in  the  cradle  those  rising  manufacturers  in  the  United 
States." 

The  problem  confronting  the  dumping  of  foreign 
nations  is  by  no  means  a  dead  issue,  nor  an  unimportant 
one.  It  is  such  as  to  merit  serious  consideration  at  the 
present  time,  as  is  seen  in  iron  and  steel  industries  of 
England,  Germany  and  the  United  States. 

278.  "Dumping''  a  present  problem. — Of  permanent 
competition  from  England  and  Germany  in  the  heavy 
iron  and  steel  trade,  the  United  States  Steel  Corpora- 
tion has  no  reason  to  be  afraid.  This  appears  from  the 
comparative  prices  of  pig  iron  and  steel  rails.  The 
prices  charged  by  steel  producers  in  free  trade  England 
are  about  equal  to  those  charged  in  protectionist 
America.  The  tariff  does  not  seem  to  make  much  dif- 
ference. The  matter  is  not  open  to  argument.  The 
official  figures  of  prices  for  the  last  decade  are  subject 
to  only  one  interpretation.  Over  a  period  of  ten  years, 
the  prices  of  iron  and  steel  would  not  have  been  any 
lower  in  the  United  States  if  Americans  had  paid  the 
cost  to  English  consumers  plus  the  cost  of  transpor- 
tation. 

But  would  American  steel  buyers  have  paid  English 
prices?  Here  we  come  upon  the  heart  of  the  whole 
controversy.  Without  the  intervening  wall  of  tariff 
duties,  and  whenever  depression  reduced  the  domestic 
demand  for  EiUglish  and  German  steel,  this  country 
would  have  been  made  the  dumping  ground  for  the 


340  ECONOMICS 

surplus  products  of  their  mills  at  prices  as  close  to  the 
prime  cost  of  production  as  would  have  been  necessary 
to  make  rapid  sales.  Price-cutting  is  essential  to  the 
success  of  occasional  invasions  of  foreign  markets. 
When  the  German  or  American  producer  attempts  to 
sell  rails  in  the  English  market,  he  encounters  the  strong 
though  passive  resistance  of  established  trade  conditions. 
He  is  regarded  as  an  interloper.  He  can  do  little  busi- 
ness save  by  offering  great  inducements  in  lower  prices 
than  those  which  the  domestic  producer  is  seeking  to 
maintain. 

279.  Wh7/  "duminng"  is  possible. — The  invader  is 
influenced  to  reduce  prices  by  another  consideration. 
Every  ton  of  steel  unmarketable  at  home  which  can  be 
sold  at  any  figure  above  the  cost  of  the  labor  and 
materials  which  goes  into  its  making,  adds  to  the  profits 
of  the  producer,  because  it  reduces  his  cost  on  the  entire 
output  of  his  mill. 

A  German  producer  of  rails  may  have  a  prime  cost, 
that  is,  a  cost  for  labor  and  materials,  of  $16  per  ton. 
To  this  amount  must  be  added  expenses  of  maintenance, 
salaries,  depreciation  of  plant  and  interest,  amounting 
on  an  output  of  1,000,000  tons  to  $3,000,000  or  $3  per 
ton.  His  total  cost  is,  therefore,  $19  a  ton,  and  if  he 
sells  his  entire  output  at  $22.50  he  is  making  large  prof- 
its. But  suppose  that  Germany  suffers  from  an  indus- 
trial depression  which  reduces  the  domestic  demand  for 
the  products  of  this  mill,  whose  prices,  if  it  is  in  a  syndi- 
cate, we  may  assume  to  remain  unchanged  to  the  Ger- 
man consumer,  to  500,000  tons.  The  fixed  charges  and 
fixed  expenses  of  the  mill  remain  unchanged  at 
$3,000,000  per  year,  only  now,  since  they  must  be  borne 
by  half  the  number  of  tons  as  before,  they  are  $6  instead 
of  $3  a  ton.  This,  added  to  the  prime  cost  of  $16  a  ton, 


I 


THE  TARIFF  PROBLEM  341 

makes  a  total  cost  of  $22  a  ton,  leaving  only  50  cents  a 
ton  profit  and  probably  resulting  in  a  suspension  of 
^dividends. 

The  German  steel  maker  looks  about  for  relief  from 
this  situation.  He  finds  a  customer  in  England  who  will 
take  300,000  tons  for  a  colonial  railway  if  he  can  get 
them  at  $18,  only  $2  above  the  prime  cost  of  their  produc- 
tion, leaving  no  profit  and  paying  only  $2  towards  fixed 
expenses  and  interest.  In  spite  of  the  low  price  the 
German  steel  producer  instantly  accepts  the  offer,  since 
it  adds  $600,000  to  his  profits  for  the  year,  bringing 
them  up  to  $850,000. 

280.  Production  on  a  large  scale  economical. — To 
understand  how  this  comes  about  it  will  be  necessary  to 
produce  two  statements :  The  first  showing  the  expenses 
and  receipts  of  our  steel  mill,  when  producing  500,000 
tons,  just  half  its  total  capacity,  and  selling  this  reduced 
output  at  $22.50  per  ton  in  the  domestic  market;  and  the 
second,  showing  the  same  items  changed  by  the  addi- 
tion of  300,000  tons  of  export  business  sold  at  $18  per 

ton. 

I. 

EXPENDITURES.  INCOME. 

Materials  and  labor $  8,000,000    500,000  tons  @  $23.50    $11,250,000 

Interest,     salaries,     mainte- 
nance, etc 3,000,000 

Net   profit    250,000 

$11,250,000  $11,250,000 

II. 

Materials  and  labor $12,800,000    500,000  tons  @  $22.50  -»  „jg  g^^  ^^^ 

300,000  tons  @     18.00  J        '      ' 
Interest,     salaries,     mainte- 
nance          3,000,000 

'h      Net  profit  850,000 

i^  — ^.^^— ^—  

$16,650,000  $16,650,000 


842  ECONOMICS 

The  significant  figure  in  the  calculation  is  the  $3,000,- 
000  of  fixed  charges  and  expenses  which  must  be  paid 
whether  the  sales  are  large  or  small.  Because  of  this 
fact,  anything  above  $16  a  ton  is  so  much  clear  gain, 
and,  if  necessary  to  get  the  business,  a  price  of  $16.25 
will  be  named.  By  accepting  this  low  priced  order  of 
300,000  tons,  instead  of  a  beggarly  $250,000,  a  year, 
entirely  too  narrow  a  margin  for  safety,  the  German 
producer  raises  his  profits  to  almost  $850,000,  a  re- 
spectable and  comfortable  sum.  For  the  same  reason, 
if  a  price  of  $18  would  not  bring  out  English  business, 
the  German  could  very  well  afford  to  go  down  to  $16.25, 
only  25  cents  direct  profit,  but  adding  $75,000  to  his 
year's  earnings.  Lower  than  $16  he  would  not  go. 
Each  ton  of  steel  must  pay  the  cost  of  its  own  produc- 
tion. Down  to  $16,  however,  the  German  exporter  will 
very  cheerfully  descend. 

281.  The  United  States?  Steel  Corporation  and 
"dumping/' — The  United  States  Steel  Corporation 
occasionally  follows  the  same  course,  pushing  its  wares 
into  foreign  markets  by  offering  prices  which  would 
spell  ruin  if  applied  to  its  domestic  business,  but  which 
show  large  additional  profit  when  the  object  is  merely 
to  cut  the  fixed  expenses  and  charges  which  must  be 
borne  by  each  ton  of  the  corporation's  output.  The 
consequences  of  this  policy  to  English  producers  are 
most  unfortunate.  Although  the  volume  of  these  cut 
price  imports  may  not  be  large,  compared  with  the  total 
sales  of  English  mills,  they  nevertheless  tend  to  demoral- 
ize the  trade,  they  make  consumers  dissatisfied,  and  under 
some  circumstances  they  may  break  down  prices  to  a 
point  where  all  but  the  strongest  domestic  producers  are 
losing  money.  This  "dumping"  of  low  priced  goods 
by  German  and  American  producers  whenever  industrial 


THE  TARIFF  PROBLEM  343 

depression  reduces  their  domestic  demand,  furnishes 
to  the  Enghsh  protectionist  his  soundest  argument. 
While  it  has  not  yet  prevailed  to  change  the  time- 
honored  policy  of  free  trade  under  which  England  has 
prospered  and  which  the  ruling  classes  regard  as  the 
cause  of  her  prosperity,  the  existence  of  the  "dumping" 
evil  is  recognized,  and  students  of  British  policy  believe 
that  measures  of  protection,  if  not  of  retaliation,  must 
eventually  be  adopted  by  the  government. 

282.  A  tariff  wall  prevents  dumping. — We  have 
now  reached  the  answer  to  the  question  with  which  we 
started.  Free  trade  in  iron  and  steel  for  the  United 
States  means  that  this  country  shall  open  its  doors  to  the 
free  entry  of  the  surplus  products  of  British  and  Ger- 
man mills  whenever  industrial  depression  makes  Ameri- 
can sales  profitable.  With  the  tariff  removed,  British 
and  German  steel  can  be  sold  at  a  small  profit  as  far 
west  as  Chicago  and  St.  Louis.  Throughout  the 
eastern  states,  where  most  of  the  iron  and  steel  produc- 
tion is  utilized,  the  present  scale  of  prices  would  offer  the 
foreigner,  even  after  the  sea  and  rail  rates  were  paid,  a 
considerable  margin  of  profit.  That  he  would  take  ad- 
vantage of  this  opportunity  to  enter  the  greatest  steel 
market  in  the  world  and  thus  keep  his  mills  in  full 
operation  whenever  the  domestic  demand  failed  him 
must  be  admitted. 

The  effect  of  these  sales  upon  the  United  States  Steel 
Corporation  and  upon  the  American  iron  and  steel  in- 
dustry, will  depend  somewhat  upon  circumstances.  It 
must  not  be  supposed  that  these  imports  will  be  con- 
tinuous. American  producers  would  have  the  great 
advantage  remaining  that  their  methods,  rolls,  sizes  and 
grades  are  adapted  to  local  needs.  Their  business 
alliances,  also,  especially  in  the  case  of  the  United  States 


344.  ECONOMICS 

Steel  Corporation,  would  greatly  assist  them  in  holding 
the  market.  Throughout  a  large  section  of  populous 
territory  in  the  West,  moreover,  they  need  not  fear 
European  competition.  The  erection  of  large  works  at 
Gary,  Indiana,  and  Duluth,  Minnesota,  by  the  Trust, 
is  a  recognition  of  the  growing  importance  of  the  West 
as  a  consumer  of  steel.  Finally,  it  is  reasonable  to  sup- 
pose that  the  railroads  would  aid  the  American  steel  com- 
panies, which  furnish  them  a  large  amount  of  freight, 
by  adjusting  rates  to  the  disadvantage  of  the  importer. 
Altogether,  this  combination  of  natural  advantages 
would  seriously  handicap  the  foreigner  in  his  attempt 
to  enter  the  American  market.  They  would  invade  us 
in  force  only  when  compelled  by  the  decline  of  their 
domestic  business. 

283.  Foreign  importations  not  always  an  evil. — 
Furthermore,  unless  industrial  depression  in  either 
England  or  Germany  coincided  in  point  of  time  with 
depression  in  the  United  States,  free  iron  and  steel  would 
prove  to  the  American  consumer  an  undisguised  blessing, 
and  would  in  no  way  injure  the  producer.  For  example, 
the  demand  for  steel  for  three  years  prior  to  the  autumn 
of  1907,  can  be  described  by  no  milder  word  than 
ravenous.  All  the  mills  were  far  behind  with  their 
orders ;  even  high  premiums  could  not  hasten  deliveries. 
At  the  same  time  the  railroads  were  congested  with 
freight.  If  cars  moved  forward  fifteen  miles  a  day  over 
the  trunk  lines  the  consignee  might  count  himself  for- 
tunate. At  such  a  time  it  would  have  been  most 
beneficial  to  the  consumer  of  steel  along  the  Atlantic 
seaboard  if  the  tariff  had  been  removed,  and  foreign 
iron  and  steel  allowed  to  enter.  As  it  was,  even  in  the 
face  of  duties  of  $4  a  ton  on  pig  iron,  $7.84  on  rails,  and 
so  on  to  higher  figures,  $30,000,000  of  iron  and  steel 


THE  TARIFF  PROBLEM  345 

products,  so  great  was  the  demand,  were  imported  dur- 
ing the  year  ending  June  30,  1906.  Prices  would  not 
have  been  affected  under  these  conditions  by  the  largest 
imports  which  England  and  Germany  have  ever  been  in 
a  position  to  send  us.  One  very  obvious  solution  of  the 
tariff  problem  has  been  suggested,  that  a  permanent 
tariff  commission  should  be  appointed  with  power  to 
remove  or  restore  duties  according  to  the  conditions  of 
the  domestic  market.  Such  a  commission  need  have  had 
no  hesitation  in  removing  the  iron  and  steel  duties  during 
1906.  On  the  other  hand,  in  1908,  when  England  and 
Germany  were  suffering  along  with  the  United  States 
from  a  world-wide  industrial  breakdown,  the  absence  of 
tariff  protection  would  have  meant  that  prices  would 
have  been  slaughtered  by  heavy  importations  and  the 
Steel  Trust  forced  into  bankruptcy  by  its  abnormal  fixed 
charges,  $56,700,000  a  year,  which  a  25  per  cent  decline 
in  prices  would  have  left  the  company  insufficient  rev- 
enues to  meet. 

Whether  such  a  result  would  make  for  the  general 
welfare,  it  is  difficult  to  decide.  It  is,  moreover,  prob- 
able that  before  another  depression  may  be  expected,  the 
Steel  Trust  will  have  grown  so  strong  as  to  view  with 
indifference  the  efforts  of  foreigners  to  invade  its  terri- 
tory. Whatever  our  opinions  as  to  the  future,  however, 
it  is  a  satisfaction  to  reach  the  conclusion  that  whatever 
the  tariff  may  have  done  toward  creating  and  supporting 
monopolies  in  other  lines  of  production,  its  only  relation 
to  the  Steel  Corporation  has  been  to  protect  it,  in  com- 
mon with  other  American  producers  of  iron  and  steel, 
from  the  surplus  production  of  Germany  and  England. 

Whatever  may  be  the  respective  arguments  of  free 
trade  and  protection,  it  is  not  expected  by  wisely  in- 
formed students  of  this  question  that  the  United  States 


346  ECONOMICS 

will  abandon  the  protective  system.  The  fact  remains 
that  an  enormous  amount  of  capital  is  invested  in  pro- 
ductive industries,  and  that  a  large  number  of  employes 
are  dependent  upon  these  for  their  living,  and  that  the 
abolition  of  the  tariff  would  mean  ruin  for  many  of  these. 
But  while  protection  may  well  be  considered  the  settled 
policy  of  the  American  people  and  the  voice  of  free 
trade  silenced  as  far  as  practical  affairs  go,  it  by  no 
means  follows  that  the  tariff  question  is  no  longer  a  live 
issue.  While  we  as  a  nation  believe  in  protection,  the 
kind  and  amount  of  protection  is  ever  a  matter  open  to 
discussion.  It  is  contended  that  the  recent  protective 
tariffs  have  aided  the  growth  of  monopolies,  that  the 
admitted  testimony  of  one  of  the  trust  magnates  is  to 
the  effect  that  the  "tariff  is  the  mother  of  the  trusts." 
How  the  tariff  shall  be  used  only  to  protect  American 
industry  and  not  to  enable  overgrown  monopolies  further 
to  enrich  their  coffers,  is  a  prominent  part  of  the 
present  tariff  agitation. 

284.  The  need  for  reciprocity. — Another  part  of  the 
tariff  problem  refers  to  the  subject  of  reciprocity.  The 
high  tariffs  passed  at  the  time  of  the  Civil  War,  and 
since  maintained  with  occasional  modifications,  have  af- 
forded our  industries  a  virtual  monopoly  of  the  American 
home  market.  For  some  time  after  the  close  of  the  war 
the  American  producer  found  that  this  market  was  all 
that  he  could  handle.  We  have  now  reached  a  place  in 
the  development  of  our  manufacturing  where  the  Ameri- 
can producer  has  outgrown  the  American  market.  He 
feels  that  he  is  entitled  to  a  slice  of  the  world's  market. 
The  means  to  this  end  is  reciprocity.  This  growth  of 
American  manufacturing  has  resulted  in  a  strong  de- 
mand for  a  more  liberal  tariff  policy.  Going  hand  in 
hand  with  this  agitation  there  has  been  an  increasing  de- 


I 


THE  TARIFF  PROBLEM  347 

mand  for  a  lowering  or  entire  removal  of  the  tariff  duties 
on  the  raw  materials  of  manufacturing.  This  is  desired 
so  that  the  American  manufacturer  will  not  be  handi- 
capped in  neutral  foreign  markets  by  being  compelled  to 
pay  more  for  his  raw  material  than  his  English  or  Ger- 
man rivals.  There  is  no  excuse  or  justification  whatever 
for  the  tariff  on  lumber,  copper,  bituminous  coal,  raw 
wool  and  hides.  The  manufacturing  interests  in  the 
United  States  need  cheap  raw  materials,  no  matter  from 
where  these  materials  are  derived. 

285.  What  kind  of  a  tariff  system  shall  we  adopt? — 
A  final  phase  of  the  tariff  problem  involves  the  question 
of  the  kind  of  tariff  system  that  we  shall  adopt.  There 
have  been  in  vogue  three  general  types,  known  as  the 
general  autonomous  tariff,  the  maximum  and  minimum 
tariff  and  conventional  tariff.  The  United  States  has 
the  first  kind,  France  the  second,  and  Germany  the 
third. 

There  has  been  a  growing  feeling  in  the  United  States 
that  a  straight  general  tariff  such  as  the  United  States 
had  is  too  inelastic  and  is  therefore  not  suited  for  a 
nation  seeking  to  gain  trade  concessions  from  other 
nations.  In  many  ways  the  German  system  of  making 
individual  trade  treaties  with  other  nations  is  the  most 
satisfactory  system  of  conserving  at  the  same  time  the 
interests  of  protection  and  of  reciprocity.  However, 
this  system  could  not  be  readily  introduced  into  the 
American  system  of  government  since  its  treaty-making 
power  rests  in  two  separate  branches  of  the  government. 
A  commercial  treaty  requires  centralized  authority  and 
a  certain  degree  of  diplomacy  in  its  execution.  Con- 
sidering all  phases  of  the  question,  the  maximum  and 
minimum  system  seems  best  suited  to  American  condi- 
tions, and  for  this  reason  several  features  of  this  sys- 


348  ECONOMICS 

tern  have  been  recently  adopted  by  the  United  States 
government.  After  this  general  problem  referring  to 
the  kind  of  tariff,  is  settled,  there  still  remains  the  ques- 
tion as  to  what  shall  constitute  the  difference  between 
the  maximum  and  minimum  duty  and  many  details  of 
administration.  Finally  a  tariff  perfectly  adjusted  to 
American  conditions  today  may  be  wholly  out  of  har- 
mony with  conditions  a  decade  hence.  The  tariff  prob- 
lem can  never  be  definitely  settled  for  all  time,  but  this 
is  merely  the  price  which  all  nations  must  pay  which 
would  remain  in  a  progressive  and  dynamic  condition. 


•>^ 


CHAPTER  III 

TRUST  PROBLEM 

286.  The  beginning  of  the  trust  movement. — In  the 
following  account  of  the  history  of  the  trust  movement 
the  writer  has  borrowed  liberally  from  those  sections  of 
*'Trust  Finance"  which  treat  of  that  subject.^ 

The  Standard  Oil  Company,  the  first  trust,  was  or- 
ganized in  1882.  The  second  large  combination  was  the 
American  Sugar  Refining  Company,  which  was  formed 
in  1887.  With  the  organization  of  these  combinations 
the  trust  movement  may  be  said  to  have  begun.  It  did 
not,  however,  assume  immediate  importance.  It  is  true 
that  the  period  immediately  following  the  organization 
of  the  Sugar  Trust  was  marked  by  a  general  outcry 
against  monopoly,  and  that  popular  sentiment  took 
form  in  numerous  anti-trust  laws  enacted  by  state  legis- 
latures and  in  the  drastic  Sherman  Law  of  1890;  but 
neither  the  number  of  companies  formed,  nor  their 
aggregate  capitalization  and  resources,  gave  any  reason 
to  suppose  that  the  movement  toward  the  uniting  of 
manufacturing  plants  into  large  combinations  would 
assume  a  more  than  limited  importance.  Up  to  1893, 
when  the  panic  put  a  sudden  stop  to  all  kinds  of  com- 
pany promotion,  the  securities  of  only  twenty  industrials 
of  any  importance  had  been  listed  on  the  New  York 
Stock  Exchange.  Besides  those  already  mentioned,  the 
principal  combinations  were  the  National  Lead  and  the 
Distilling  and  Cattle-Feeding  Trusts,  both  organized 

lE.  S.  Meade,  "Trust  Finance."— Appleton  &  Co. 

349 


350  ECONOMICS 

in  1887;  the  American  Tobacco  Company  in  1890,  and 
the  General  Electric  Company  in  1892.  With  the  ex- 
ception of  the  sugar,  oil  and  rubber  trades,  there  was  not 
even  an  approach  to  monopoly ;  only  a  few  of  the  leading 
industries  had  been  consolidated;  and  the  total  capital 
stock  of  all  the  manufacturing  combinations  organized 
from  1860  to  1893,  inclusive,  was  less  than  $1,000,- 
000,000. 

287.  The  rapid  growth  in  1898, — The  real  trust  move- 
ment dates  from  1898.  Four  years  from  that  date 
found  the  leading  industries  of  the  United  States  reor- 
ganized along  lines  of  consolidation.  In  three  years, 
1898-1900,  one  hundred  and  forty -nine  large  combina- 
tions, with  a  total  capitalization  of  $3,578,650,000,  were 
formed.  Hardly  an  industry  escaped  consolidation. 
Coal-mining,  iron  and  steel,  copper,  lead,  zinc  and  silver; 
paper,  leather,  rubber,  salt,  starch,  chemicals,  cordage, 
ice,  glass,  paving,  and  roofing,  practically  all  of  the 
great  industries  whose  produce  is  used  in  further  pro- 
duction, have  been  in  large  part  consolidated. 

The  field  of  consumption  goods,  i.  e.,  those  products 
which  are  sold  over  the  retail  counter,  has  been  scarcely 
less  affected  by  the  combination  movement.  In  this 
field  we  have  the  oil  and  sugar  companies  already  men- 
tioned, the  Standard  Oil  Company  having  been  formed 
anew  in  1899.  We  have  beer,  whiskey,  and  tobacco 
produced  by  trust  organizations.  The  United  Fruit 
Company,  the  National  Biscuit  Company,  the  Diamond 
Match  Company,  the  American  Woolen  Company,  the 
International  Thread  Company,  the  American  Writing 
Paper  Company,  the  United  States  Flour-Milling  Com- 
pany, the  International  Silver  Company,  have  been  or- 
ganized to  produce  the  necessities  or  the  luxuries  of  the 
consumer. 


THE  TRUST  PROBLEM  351 

The  trust  movement  began  with  the  close  of  the  in- 
dustrial depression  which  followed  the  panic  of  1893,  and 
which,  as  a  matter  of  origin,  can  probably  be  traced  to  the 
panic  caused  by  the  failure  of  Baring  Brothers  in  1890. 
During  this  period,  the  steady  fall  of  prices,  and  the 
slow-moving  liquidation  of  credit  had  severely  handled 
the  manufacturers  and  merchants  of  the  United  States. 
The  aggregate  liabilities  of  failure  in  manufacturing 
and  trading  from  1894  to  1898  exceeded  $725,000,000. 
Many  of  those  who  did  not  fail  outright  labored  under 
heavy  burdens  of  debt.  Few  men  earned  large  profits ; 
almost  every  one  had  his  scale  of  earnings  greatly  re- 
duced. Manufacturers  saw  their  plants  deteriorate 
for  lack  of  the  money  to  keep  them  in  repair.  Bank 
clearings  decreased,  from  1892  to  1893,  $8,700,- 
000,000. 

The  securities  market  was  especially  depressed.  An 
index  number  made  up  from  the  prices  of  ten  leading 
railroad  stocks  shows  a  decline  from  1892  to  1896,  of 
31  per  cent.  Sale  of  stocks  on  the  New  York  Stock 
Exchange  from  1894  to  1896,  compared  with  the  period 
1891  to  1894,  decreased  $100,000,000.  Although  the 
general  depression  throughout  the  country  produced  a 
large  surplus  of  idle  funds  which  flowed  into  the  New 
York  banks,  the  low  interest  rates  resulting  were  power- 
less to  excite  public  interest  in  speculation.  The  people 
were  busy  paying  their  debts.  *  They  had  just  experi- 
enced the  penalties  of  optimism,  and  they  were  in  no 
humor  for  risk-taking.  The  Financial  Review  of  1895 
sums  up  the  financial  situation  as  follows:  "The  result 
of  these  hard  times  has  been  to  make  our  own  investors 
unusually  cautious  and  to  produce  extreme  wariness  of 
American  securities  on  the  part  of  foreign  capital. 
Under  such  conditions  it  could  not  be  expected  that  the 


362  ECONOMICS 

listing"  of  stocks  and  bonds  representing  new  enter- 
prises would  be  heavy." 

288.  The  relation  of  prosperity  to  the  trust  move- 
ment.— With  the  summer  of  1897,  recovery  began.  A 
large  wheat-crop,  sold  at  good  prices,  increased  the  earn- 
ings of  the  grain-carrying  railroads  and  stimulated 
investment  in  their  securities.  From  1896  to  1897,  the 
earnings  of  the  five  "Granger"  roads  running  into  Chi- 
cago increased  $13,000,000.  The  effect  of  increased 
earnings  was  soon  felt  in  the  stock  market.  During 
1897,  the  prices  of  these  Granger  stocks  increased  as 
follows,  the  first  quotation  being  the  lowest  price  in 
January  and  the  second  the  highest  price  recognized 
during  the  year: 

Atchison,  Topeka  &  Santa  F6  (preferred) 22%  to    Soi/g 

Chicago,  Burlington  &   Quincy Q9%  to  IO214 

Chicago,  Milwaukee  &  St.   Paul 72%  to  102 

Chicago  &  Northwestern 1021^  to  132y2 

Chicago,  Rock  Island  &  Pacific. G1%  to    9714 

Other  railroad  stocks  advanced  in  sympathy  with  the 
Grangers,  the  increase  being  as  much  as  twenty  points 
in  the  case  of  several  roads,  and  reaching  29^/^  in  North- 
ern Pacific  preferred.  Under  the  stimulus  of  higher 
prices,  the  sale  of  stocks  on  the  New  York  Stock  Ex- 
change increased  in  one  year  22,000,000  shares.  The 
buyer,  however,  was  as  yet  almost  wholly  confined  to 
old  securities.  Large  amounts  of  low-priced  reorgan- 
ization securities  were  coming  into  the  market,  and  the 
tempting  bargains  which  these  offered  occupied  the 
attention  of  investors;  while  the  rapid  rise  in  all  rail- 
road stocks  furnished  abundant  opportunities  for  spec- 
ulation. 

The  industrial  revival  gathered  strength  in  1898; 
another  large  harvest  and  continued  high  prices  in- 


THE  TRUST  PROBLEM  353 

creased  Granger  earnings  $16,650,000  over  the  high 
figures  of  1897,  and  these  stocks  continued  to  hft  the 
entire  market.  Other  industries  also  increased  their  out- 
put. From  1898  to  1899,  for  example,  the  production 
of  pig  iron  increased  2,121,000  tons.  Foreign  trade 
was  also  favorable.  During  1898,  exports  of  mer- 
chandise exceeded  imports  by  $594,000,000,  and  an  im- 
portation of  $104,000,000  of  gold  strengthened  the  basis 
of  American  credit.  General  business  was  stimulated 
by  these  favorable  conditions.  From  1896  to  1898, 
New  York  clearings  increased  $13,000,000,000.  The 
rapid  improvement  of  business  united  with  the  success- 
ful result  of  the  Spanish  War  to  inspire  in  all  classes  the 
most  sanguine  optimism.  The  people  believed  that  good 
times  and  high  prices  had  come  to  stay,  and  the  national 
feeling  found  instant  expression  in  the  quotations  of 
securities. 

The  first  buying  of  stocks  came  from  the  investors 
who  were  attracted  by  the  large  earnings  of  railroads 
to  transfer  their  capital  to  more  promising  investments. 
A  speculative  demand  for  these  securities  set  in  at  the 
same  time,  and  large  amounts  were  bought  to  sell  at  an 
advance.  The  profits  which  were  rapidly  realized  at- 
tracted wide  notice  and  the  demand  for  stocks  became 
general.  The  stock  market  was  the  place  where  money 
was  to  be  made.  People  of  every  class  and  condition 
caught  the  fever  of  speculation  and  were  ready  to  buy. 
It  was  impossible  to  supply  this  demand  for  stocks  from 
existing  isi:ues.  Most  of  these  were  held  for  invest- 
ment, and  only  small  quantities  came  into  the  market. 
The  time  was  ripe  for  the  promotion  of  new  enterprises. 
New  companies  were  organized  and  their  securities  were 
readily  sold. 

289.  The  promoter  and  the  trust  movement, — This 

1—23 


354  ECONOMICS 

condition  called  the  "promoter"  to  the  front.  It  is  the 
promoter  who  organizes  new  companies  and  places  their 
prospects  before  the  speculative  and  investing  pubUc. 
His  organizing  energy  usually,  although  not  of  ne- 
cessity, follows  the  line  of  largest  immediate  advantage 
to  the  community.  If  there  is  an  opportunity  for  new 
industries  or  new  combinations  of  industries,  the  pro- 
moter organizes  companies  to  take  advantage  of  the  op- 
portunity. Noting  the  most  promising  outlets  for 
industrial  activity,  he  capitalizes  the  new  opportunities 
and  markets  the  securities  while  the  public  is  in  the 
humor  of  buying  shares.  If  we  go  back  to  the  early 
years  of  our  industrial  history,  we  find  the  promoter 
organizing  banking  and  land  companies.  At  a  later 
period,  railroad  schemes  were  put  on  the  market.  Public 
service  corporations,  mines,  and  street  railways  have 
each  had  their  share  of  attention.  Whenever  an  oppor- 
tunity is  presented  for  the  exploitation  of  new  resources 
or  new  conditions,  the  promoter  is  on  hand  with  his 
prospectuses  and  his  propositions  "to  be  submitted  to 
the  approval  of  the  investing  public." 

Railroads  had  furnished  the  bulk  of  the  new  securities 
since  the  Civil  War,  but  in  1898  large  amounts  of  low- 
priced  railroad  stocks  were  no  longer  available.  The 
country  has  been  well  equipped  with  transportation  fa- 
cilities and  few  projects  for  new  mileage  were  put  for- 
ward. From  1886  to  1889,  28,177  miles  of  railroad 
were  constructed,  from  1896  to  1899  only  7,427  miles. 
From  1886  to  1889,  $1,167,000,000  of  railroad  securities 
were  issued.  From  1896  to  1899,  however,  there  was  an 
increase  of  only  $371,842,000  of  railway  stocks  and 
bonds;  many  of  these,  moreover,  being  investment  se- 
curities and  selling  at  high  prices.     The  former  outlet 


THE  TRUST  PROBLEM  356 

for  investment  had  been  closed,  and  a  new  one  was  to 
be  opened. 

This  outlet  was  furnished  by  the  organization  of  the 
industrials.  Says  the  Financial  Review  of  1900  in  its 
report  for  1899: 

The  extreme  industrial  activity  engendered  a  feeling  of  great 
confidence,  very  propitious  to  the  creation  and  multiplication  of 
new  industrial  enterprises.  Easy  money  in  the  early  months, 
caused  by  a  congestion  of  currency  at  this  center,  materially 
aided  the  movement.  The  result  was  the  formation  and  flotation 
of  industrial  undertakings  of  enormous  magnitude  and  in  un- 
paralleled numbers.  In  every  industry,  in  every  line  and  branch 
of  trade,  great  consolidations  and  amalgamations  were  planned, 
and  in  most  cases  carried  into  effect.  It  was  the  great  opportu- 
nity of  the  promoter,  and  he  was  not  slow  to  avail  himself  of  it. 
Seeing  in  any  given  trade  a  large  number  of  separate  businesses 
or  manufactories  his  effort  was  to  merge  them  together  in  one 
large  corporation,  incurring  partial  or  complete  control,  and 
giving  at  least  the  appearance  of  monopoly. 

When  one  considers  the  severe  nature  of  the  competi- 
tion to  which  manufacturers  on  all  hands  had  been  sub- 
ject prior  to  1898,  it  is  not  difficult  to  understand  why 
the  regime  of  free  competition  was  productive  of 
manifold  hardships  to  the  manufacturer.  Competition 
might  be  considered  the  life  of  the  trade,  but  at  the 
close  of  the  last  industrial  depression  it  was  regarded 
as  the  death  of  profits.  It  was  highly  desirable  from 
the  manufacturer's  view-point  to  stop,  or  at  least  abate, 
this  stniggle,  which  benefited  nobody  save  the  retailer, 
and  which,  even  in  his  case,  made  it  necessary  straight- 
way to  pass  the  benefit  on  to  his  own  customers.  The 
producers  were  tired  of  working  for  the  public.  They 
desired  a  larger  profit  without  such  an  effort  to  get  it. 


356  ECONOMICS 

and  they  wished  to  have  the  profit  available  for  distribu- 
tion and  not  locked  up  in  plant  and  equipment.  In 
1898  and  1899  the  time  was  ripe  for  a  change.  Men 
were  weary  of  competition,  and  the  era  of  combination 
was  gladly  welcomed. 

290.  Evolution  of  the  trust. — Many  attempts  had 
been  made  before  1898  to  lessen  the  recognized  evils 
of  competition.  These  attempts  had  usually  taken  the 
form  of  pools,  many  of  which,  especially  in  the  iron 
and  steel  trades,  were  organized  during  the  last  indus- 
trial depression.  A  pool  is  a  voluntary  association  of 
sellers  who  place  the  marketing  of  their  product  under 
some  central  control  or  general  restriction.  The  primary 
object  of  such  agreements  is  to  secure  profitable  prices, 
either  directly  or  by  means  of  payments  from  a  central 
treasury,  to  the  members  of  the  association.  The 
methods  by  which  these  profitable  prices  have  been  se- 
cured are  in  general  as  follows:  (1)  The  output  of 
the  mills  included  in  the  association  is  restricted,  so  that 
the  prices  can  be  advanced  by  the  limitation  of  supply; 
and  (2)  the  buyer  is  held  to  the  regular  quotations, 
and  is  unable,  by  playing  off  one  competitor  against 
another,  to  obtain  special  concessions.  The  pool  may 
go  further  than  the  regulation  of  prices  and  output; 
it  may  secure  favorable  terms  on  material  purchased; 
it  may  deal  as  an  association  with  railroads  to  obtain 
such  concessions  as  are  granted  to  large  shippers,  and 
it  may  assist  its  members  in  dealing  with  organized 
labor.  As  a  general  proposition,  however,  the  purpose 
of  a  pool  is  to  regulate  production  and  control  prices, 
leaving  other  details  of  management  to  the  separate 
companies. 

291.  The  weakness  of  the  pool. — The  essential  weak- 
ness of  this  form  of  organization  is  its  inability  to  en- 


THE  TRUST  PROBLEM  357 

force  its  agreements.  The  necessity  of  voluntary  assent 
on  the  part  of  every  member  of  the  association,  the 
liberty  of  each  to  withdraw  on  short  notice,  and  the  dif- 
ficulty of  establishing  relations  of  mutual  confidence 
among  competitors,  all  unite  to  emphasize  this  defect. 
The  members  of  a  pool  have  long  since  formed  the 
habit  of  closely  scrutinizing  the  moves  of  those  in  the 
same  business,  and  even  a  small  misunderstanding  often 
creates  a  feeling  of  mutual  distrust  and  apprehension 
which  works  the  destruction  of  harmony  and  the  final 
dissolution  of  the  organization. 

The  successful  management  of  a  pool  is  peculiarly 
difficult  during  a  period  of  business  depression,  when 
business  at  remunerative  prices  is  hard  to  get.  Strong 
producers  at  such  a  time  are  suspected  of  attempts  to 
obtain  more  than  their  allotted  share  of  orders  by  meth- 
ods which  are  contrary  to  the  spirit,  if  not  the  letter,  of 
the  pool  agreement.  For  example,  the  Bessemer  Steel 
Pool  originally  applied  only  to  the  tonnage  of  steel 
billets,  ingots,  bars  or  slabs.  The  steel  which  was  rolled 
into  merchantable  shapes  did  not  count  in  the  allotment. 
Some  of  the  large  producers  took  advantage  of  this 
fact  to  market  as  much  as  possible  of  their  output  in 
the  form  of  finished  material,  by  this  method  of  indirec- 
tion far  exceeding  the  limits  of  their  allotment,  and  they 
could  not  be  penalized  for  so  doing.  Such  offenses 
against  the  pool  agreements  made  their  permanent  con- 
tinuance impossible. 

292.  The  original  organization  of  the  trust. — The 
"Trust"  movement  of  the  eighties  promised  a  more  sat- 
isfactory restriction  of  competition.  In  this  form  of 
organization,  agreement  among  manufacturers  as  to 
prices  and  outputs  was  secured  by  depositing  the  stocks 
of  the  constituent  companies  with  trustees  in  exchange 


358  ECONOMICS 

for  trust  certificates.  These  entitled  the  holder  to  such 
dividends  as  might  be  declared  on  the  stocks,  and  also 
empowered  them  to  vote  for  the  trustees  in  the  same 
manner  as  the  stockholders  of  a  corporation  elect  their 
directors.  The  trust  certificate,  moreover,  could  be 
dealt  in  on  the  stock  exchange  in  the  same  way  as  the 
certificates  issued  by  the  voting  trust  of  a  corporation. 
The  trustees,  being  in  control  of  the  stock  of  the  sev- 
eral corporations  included  in  the  trust,  directed  the  man- 
agement of  these  companies,  and  secured  a  uniform 
policy  upon  prices  and  output.  Permanence  of  control 
was  secured  by  making  the  transfer  of  stock  to  the 
trustees,  except  by  formal  dissolution  of  the  trust,  as 
provided  for  in  the  articles  of  the  association,  irrevocable. 
The  trust,  so  far  as  it  included  former  competitors, 
furnished  a  more  satisfactory  restriction  of  competition 
than  the  pool.  It  was  open  to  fewer  objections;  its 
organization  was  permanent;  its  government  was 
centrahzed,  responsible  and  representative.  The  con- 
trol of  the  constituent  corporations  by  the  central 
organization — the  trustees — ^was  complete,  for  the 
trustees  elected  the  board  of  directors  of  each  of 
the  constituent  companies.  Because  it  was  permanent 
and  centralized,  the  trust  pursued  a  more  enlightened 
policy  as  to  prices  than  the  pool.  The  Standard  Oil 
Trust  made  a  considerable  reduction  in  the  price  of 
refined  petroleum,  and  the  sugar  trust,  although  for 
some  years  in  practical  control  of  the  market,  did  no 
more  than  to  restore  prices  to  a  living  basis.  The  Whis- 
key Trust  attempted  to  charge  excessive  prices,  but  the 
complete  failure  of  its  attempt,  owing  to  growth 
of  competition,  justified  the  wisdom  of  more  conserva- 
tively managed  organizations.  The  Cotton  Oil,  Lin- 
seed Oil,  and  Lead  Trusts  showed  no  disposition  to  prac- 


THE  TRUST  PROBLEM  359 

tice  extortion  upon  the  consumers  of  these  products. 
The  trust,  as  a  device  for  the  control  of  competition, 
was  satisfactory.  Its  legal  position,  however,  was  in- 
herently defective. 

293.  The  trust  declared  illegal. — The  trust  agree- 
ments were  matters  of  record.  Their  organizations  were 
made  under  the  usual  legal  forms,  and  the  details  of 
these  organizations  could  not  be  concealed.  The  trus- 
tees could  not  refuse  to  disclose  their  authority  for 
issuing  the  trust  certificates  which  were  dealt  in  on  the 
exchanges.  Any  stockholder  could  enforce  his  right  to 
examine  the  constitution  and  working  of  the  trust  which 
held  his  property.  Neither  could  the  fact  be  concealed 
that  these  corporations,  whose  identity  and  active  life 
had  been  preserved,  were,  under  the  trust  agreement, 
no  longer  masters  of  their  own  actions.  They  had  sur- 
rendered their  delegated  power  to  the  trustees.  A 
perfect  "combination  in  restraint  of  trade"  had  been 
effected,  and  in  view  of  the  manifold  statutes  prohibit- 
ing these  self-evident  combinations,  the  dissolutions  of 
such  combinations  waited  only  for  an  attack  upon  their 
right  to  exist. 

This  came  in  1890,  when  the  Attorney-General  of 
New  York  successfully  brought  suit  against  the  North 
River  Sugar  Refining  Company  under  the  common 
law.  The  Standard  Oil  Trust  was  also  declared  illegal 
on  similar  grounds  by  the  Supreme  Court  of  Ohio  in 
1892. 

The  result  of  these  suits  showed  that  even  without 
the  new  menace  of  the  Federal  anti-trust  law  the  legal 
position  of  the  ti*ust  had  become  impossible.  The  States 
had  prohibited  all  combinations  in  restraint  of  trade. 
The  corporation  is  the  creation  of  the  State,  and  the 
State  can  revoke  the  powers  which  it  has  granted  when 


360  ECONOMICS 

these  powers  are  exceeded  or  unlawfully  exercised. 
Certain  corporations  had  combined  into  trusts  in  order 
to  limit  competition — i.  e.,  to  restrain  trade.  These  cor- 
porations had  exceeded  their  powers,  they  had  violated 
the  laws  of  the  states  which  had  created  them,  and  their 
charters  were  therefore  forfeited.  Unless  some  new 
device  could  be  discovered  by  which  the  hardships  of 
competition  could  be  alleviated,  the  pool,  whose  exist- 
ence, though  illegal,  could  be  partially  concealed,  and 
which  was  ordinarily  safe  from  legal  attack,  whenever 
regulation  was  required,  must  still  be  employed.  Its 
defects  were  generally  admitted,  and  it  has  very  often 
aggravated  the  very  evils  which  it  was  designed  to  cure ; 
but  if  the  trusts  were  to  be  forbidden,  the  pool  seemed 
to  be  the  only  form  of  combination  possible. 

294.  The  holding  company. — Before  1889,  when  the 
corporation  law  of  New  Jersey  was  revised,  the  laws 
of  no  state  authorized  the  chartering  of  a  corporation 
for  the  general  purpose  of  owning  the  stocks  or  prop- 
erty of  other  corporations.  Consolidation  of  corpora- 
tions was  more  generally  permitted,  but  the  purchase  of 
stocks  of  other  corporations  by  a  holding  company  was 
not  considered  to  fall  within  the  field  of  corporate  priv- 
ileges. There  were  but  few  exceptions  to  the  general 
rule  that  a  corporation  should  be  organized  for  a  specific 
purpose  or  for  closely  aUied  purposes.  Pennsylvania 
had  gone  so  far  as  to  prohibit  incorporation  for  more 
than  one  purpose. 

Now  it  was  plain  that  the  trusts  could  be  preserved 
if  a  new  corporation  could  be  formed  which  was  em- 
powered to  purchase,  either  for  cash  or  with  its  own 
stock,  the  stocks  of  the  several  companies  which  were 
included  in  the  trust,  and  which  it  was  desirable  to  keep 
united  under  some  form  of  permanent  control.     The 


THE  TRUST  PROBLEM  S61 

only  changes  which  would  be  made  by  such  an  arrange- 
ment in  the  organization  of  the  combination  would  be 
these :  ( 1 )  To  substitute  for  the  certificates  of  the  old 
trust  the  shares  of  the  new  corporation;  (2)  to  change 
the  relation  of  trustee  and  trust  into  the  relation  of 
owner  and  property;  and  (3)  to  substitute  for  a  board 
of  trustees  a  board  of  directors.  The  result  would  be 
a  single  corporation  whose  assets  were  the  securities 
of  other  corporations,  each  one  in  full  possession  of 
its  corporate  faculties  and  exercising  all  of  its  lawful 
corporate  activities;  but  the  affairs  of  all  would  be 
placed  under  the  permanent  direction  of  the  company 
owning  a  controlling  interest  in  the  stock  of  each,  and 
competition  among  these  companies  would  thus  be  pre- 
vented. The  holding  company,  if  this  course  seemed 
preferable,  after  acquiring  the  stocks  of  a  corporation, 
would  dissolve  it,  remaining  in  possession  of  the  prop- 
erty which  the  canceled  stock  represented,  and  the  se- 
curities-holding company  would  also  purchase  the 
property  of  partnerships  or  individuals  without  resort 
to  the  expedient  of  organizing  them  into  corporations 
in  order  to  place  their  ownership  in  trust,  as  was  for- 
merly necessary. 

295.  The  success  of  the  holding  company. — It  is  true 
that  this  proposition  of  the  holding  company,  first 
broached  about  1890,  did  not  differ  in  principle  from 
the  illegal  trust  which  it  was  intended  to  supersede. 
The  same  combination  in  restraint  of  trade  existed  as 
before.  If  anything,  the  new  combination,  which  was 
one  of  ownership  and  not  of  trusteeship,  was  more  per- 
fect than  the  form  which  had  just  been  declared  illegal. 
The  suggested  plan  was  a  violation  of  both  the  spirit 
and  the  letter  of  the  anti-trust  laws  which  had  just 
been  successfully  invoked  against  the  sugar  trust.     A 


362  ECONOMICS 

company  whose  sole  reason  for  existence  was  to  control 
the  ownership  of  previously  competing  corporations  had 
manifestly  effected  a  combination  in  restraint  of  trade. 
All  this  was  admitted.  Moreover,  no  state  in  which  the 
sentiment  against  monopoly  was  strong  enough  to  pass 
and  enforce  the  anti-trust  law,  could  be  expected  so  to 
amend  the  statutes  of  incorporation,  as  to  permit  the' 
organization  of  corporations  to  evade  the  law.  How- 
ever attractive  the  proposition  might  be,  there  seemed 
to  be  no  way  to  bring  about  the  authorization  by  one  set 
of  laws  of  a  kind  of  corporation  whose  reason  for  exist- 
ence and  whose  purpose  of  organization  another  set  of 
laws  explicitly  forbade. 

The  difficulty  seemed  to  be  insurmountable.  For  the 
sake  of  profits,  competition  must  be  restricted.  The 
law  said  that  its  restriction  was  illegal.  No  state  legis- 
lature would  have  run  the  risk  of  legalizing  the  forma- 
tion of  corporations  to  perform  within  that  state  acts 
which  would  have  necessitated  the  repeal  of  an  anti- 
trust law  in  order  to  make  them  lawful,  and  which 
would  have  been  further  in  violation  of  the  common 
law.  But  in  those  three  italicized  words  lay  the  sal- 
vation of  the  trusts.  Although  no  state  would  empower 
a  corporation  to  defeat  the  intention  of  its  own  stat- 
utes, a  state  was  found  to  pass  an  act  of  incorpora- 
tion which  rendered  void  and  of  no  effect  the  anti-trust 
laws  of  every  state  attempting  by  statute  to  preserve 
competition.     That  state  was  New  Jersey. 

296.  The  corporation  law  of  New  Jersey. — Under  the 
provisions  of  its  act,  a  body  of  men  may  form  a  corpo- 
ration under  the  laws  of  New  Jersey,  which,  among 
other  manifold  privileges,  may  purchase  and  own  the 
stocks,  or  other  property,  of  any  corporation  engaged 
in  any  kind  of  business  in  any  state,  providing  the  forma- 


THE  TRUST  PROBLEM  363 

tion  of  this  corporation  does  not  violate  the  law  of  New 
Jersey,  on  complying  with  the  following  easy  require- 
ments: (1)  To  pay  a  small  fee  and  an  annual  tax; 
(2)  to  maintain  a  principal  office  in  the  State  of  New 
Jersey  at  the  entrance  to  which  the  name  of  their  com- 
pany is  conspicuously  displayed,  and  where  a  legal 
representative  of  the  company  can  be  found  upon  whom 
process  may  be  served;  (3)  to  keep  the  stock  transfer 
books  of  the  company  open  to  inspection  of  any  stock- 
holder at  its  New  Jersey  office;  (4)  to  make  an  annual 
report  to  the  Secretary  of  State;  (5)  to  hold  their  an- 
nual stockholders'  meeting  at  the  New  Jersey  office  of 
the  company;  and  (6)  to  have  as  one  of  their  directors 
a  resident  of  New  Jersey. 

For  momentous  consequences,  this  statute  of  New 
Jersey  is  hardly  to  be  equaled  in  the  annals  of  legislation. 
Sixteen  sovereign  states  had  passed  searching  and  strin- 
gent laws  in  prohibition  of  any  attempt  to  restrict  com- 
petition, laws  whose  detailed  minuteness  of  specification 
could  hardly  be  improved  upon,  laws  which  had  been 
effective  against  the  only  permanent  form  of  compe- 
tition regulation  yet  attempted,  and  which  undoubtedly 
represented  the  conviction  of  a  majority  of  the  people 
of  the  United  States — a  conviction  finding  more  general 
and  authoritative  expression  in  the  Sherman  Anti-trust 
Law,  and  strengthened  by  the  anti-monopoly  provision 
of  the  common  law;  a  well-nigh  unanimous  sentiment 
opposed  to  any  form  of  trust  or  pool;  and  the  little 
State  of  New  Jersey,  containing  2  per  cent  of  the 
population  and  one  and  three-tenths  of  the  wealth  of 
the  United  States,  by  the  simple  act  of  amending  its 
corporation  laws,  defied  the  anti-trust  laws  of  every 
state  which  had  passed  them. 

297.  Legality  of  the  holding  company. — The  legal 


364  ECONOMICS 

position  of  the  holding  company  was  finally  established 
by  the  United  States  Supreme  Court  in  the  case  brought 
before  it  to  test  the  applicability  of  the  Sherman  Act 
to  the  American  Sugar  Refining  Company,  which  had 
just  purchased  four  competing  refineries  in  Philadel- 
phia. The  court  held  that  the  Sherman  Act  applied 
only  to  interstate  commerce,  and  that  "the  fact  that  an 
article  is  manufactured  for  export  to  another  state  does 
not  of  itself  make  it  an  article  of  interstate  commerce." 
The  court  declared  that,  were  the  terms  of  the  act  more 
liberally  construed,  the  effect  would  be  to  give  the 
Federal  Government  control  of  nearly  all  the  business 
of  the  states,  a  right  which  it  was  never  intended  that 
it  should  possess.  Moreover,  when,  as  usually  happens 
with  the  industrial  trusts,  the  New  Jersey  corporation 
owns  no  property  other  than  the  stocks  of  other  corpo- 
rations, the  states  in  which  these  constituent  companies 
are  located  can  attack  neither  the  domestic  corporation 
which  still  preserves  its  separate  existence,  nor  the  New 
Jersey  corporation  which  is  acting  within  the  laws  of 
the  state  which  created  it.  The  company  organized  to 
own  the  stocks  or  property  of  other  companies  proved, 
therefore,  to  be  the  solution  of  the  problem  presented 
by  the  hostile  attitude  of  the  state  legislatures  toward 
the  trust.  Under  the  joint  protection  of  the  state  of  its 
origin  and  the  Constitution  of  the  United  States,  and 
secure  from  interference  by  the  federal  courts,  the 
trust,  as  this  form  of  corporate  organization,  borrowing 
its  name  from  the  institution  which  preceded  it,  is  now 
universally  known,  could  generally  a,chieve  the  purposes 
of  its  organization  without  much  difficulty.^ 

By  reconstructing  the  "trusts"  to  conform  to  the  law, 
by  capitalizing  these  permanent  pools,  the  builders  of 
the  trust  made  possible  a  widespread  reorganization  of 

*  By  the  passage  in  1913  of  the  "Seven  Sisters"  act,  New  Jersey  definitely 
limited  the  powers  of  the  holding  company.     (See  Chapter  VI,  Vol.  VIII.) 


THE  TRUST  PROBLEM  365 

competitive  industry  along  more  profitable  lines,  and 
opened  the  way  to  the  creation  of  the  huge  mass  of 
industrial  securities  which  represent  the  capitalization 
of  manufacturing  industry  in  the  United  States,  from 
participation  in  whose  profits  the  public  had  before 
been  excluded.  With  this  device  of  corporate  organiza- 
tion, escape  from  competition  was,  at  least  prospectively, 
secured. 

298.  The  economies  of  combination. — Before  1898, 
the  advantages  of  restricting  competition  had  come 
to  be  recognized.  A  sufficient  number  of  combinations 
had  been  formed  to  familiarize  the  public  with  their 
organization  and  some  of  the  details  of  their  manage- 
ment ;  the  legal  difficulties  presented  by  the  various  anti- 
trust laws  had  been  surmounted;  and,  above  all,  the 
public  had  reached  a  firm  conviction  that  the  profits 
of  combination  were  enormous.  Throughout  the  hard 
times  which  followed  the  panic  of  1893,  when  competing 
manufacturers  were  gasping  for  breath,  the  Standard 
Oil  Companies  of  the  several  states,  and  the  Sugar, 
Tobacco,  and  Rubber  companies,  experienced  Httle  in- 
convenience. American  Sugar,  for  example,  paid  12 
per  cent  on  its  common  stock  throughout  this  period, 
and  its  associates  were  scarcely  less  fortunate.  Con- 
trolling the  production  of  necessary  production  goods — 
the  demand  for  which  was  last  to  be  affected — and  se- 
cure from  the  attrition  of  competition,  these  great  cor- 
porations presented  a  startling  contrast  to  the  general 
emaciation.  Officials  of  these  companies  might  ascribe 
their  large  profits  to  the  "economies  of  combination," 
but  the  public  correctly  interpreted  this  phase  of  euphony 
to  mean  the  control  of  the  market  which  the  combina- 
tion afforded.  "Over-production,"  "the  wastes  of  com- 
petition," and  such  like  explanations  of  the  industrial 


366  ECONOMICS 

depression  from  which  the  nation  was  emerging,  united 
to  emphasize  the  advantages  of  consoHdation. 

The  time  was  ripe  for  the  universal  application  of 
the  trust  principle  to  manufacturing  industries.  On  the 
one  hand,  the  manufacturer  was  weary  of  competition 
and  anxious  either  to  combine  or  sell.  On  the  other 
hand,  stood  the  public,  deeply  impressed  with  the  profits 
of  the  trust  and  anxious  to  buy  the  shares  of  industrial 
combinations  if  opportunity  were  given.  Into  this  sit- 
uation stepped  the  promoter,  to  whom  a  more  promising 
opportunity  to  sell  stocks  had  never  been  presented. 

The  trust  movement  had  not  progressed  far  before 
cries  of  extortion  and  other  abuses  were  raised.  This 
leads  us  to  a  discussion  of  the  unfair  advantages  over 
their  competitors  taken  by  the  trusts.  This  is  the  kernel 
of  the  so-called  "trust  problem,"  for  it  is  now  generally 
recognized  that  the  problem  of  the  trust  lies  in  its  abuses 
and  not  in  the  fact  of  combination  itself. 

299.  Unfair  advantages  of  the  trusts — railroad  rates. 
— These  may  be  discussed  under  three  heads  of  (1) 
unfair  railroad  rates,  (2)  charging  low  prices  where 
there  is  competition  and  high  where  there  is  none,  (3) 
making  unfair  contracts  with  retailers. 

Whatever  may  be  the  present  attitude  of  large 
combinations  in  reference  to  unfair  railroad  rates, 
it  is  a  matter  of  common  knowledge  that  one  of 
the  biggest  factors  in  the  steady  ascendency  of 
the  Standard  Oil  Company  was  its  ability  to  secure 
lower  transportation  rates  than  its  competitors.  That 
discriminations  have  been  a  factor  in  the  past  in  hasten- 
ing centralization  in  industry  is  hardly  open  to  question. 
Despite  recent  legislation,  some  believe  that  large  ship- 
pers are  still  being  favored  by  the  railroads  at  the  ex- 
pense of  the  smaller  competitors,  though  this  is  now  very 


THE  TRUST  PROBLEM  367 

difficult  to  prove.  There  is  no  doubt  that  this  belief  lies 
at  the  basis  of  much  of  the  popular  hostility  to  the  trust, 
as  was  witnessed  during  the  famous  $29,240,000  fine 
case  against  the  Standard  Oil  Company.  It  is  generally 
felt  that  the  Beef  Trust  secured  unfair  railroad  rates 
through  its  ownership  of  refrigeration  cars  on  which 
the  railroad  allowed  an  unreasonably  high  rental  deduc- 
tion.   Rebates  are  now  prohibited  by  law. 

300.  Discriminating  prices. — On  the  subject  of  local 
price  discriminations  an  abundance  of  figures  are  pre- 
sented by  the  Industrial  Commission.  There  is,  in  the 
first  place,  a  table  of  monthly  prices  of  standard  illumi- 
nating oils  at  New  York,  Chicago  and  Cincinnati,  for  the 
fifteen-year  period  1885-1899;  the  table  was  accom- 
panied by  the  testimony  of  Mr.  Archbold,  and  is  thus 
above  suspicion  of  prejudice  against  the  Standard  Oil 
Company. 

An  examination  of  the  table  shows  that,  as  a  rule,  the 
price  at  Cincinnati  was  lower  than  at  Chicago,  and  at 
Chicago  lower  than  at  New  York,  which  must  be  ac- 
counted for  by  some  permanent  reason.  Still  it  appears 
that  on  many  occasions  the  situation  was  reversed. 
Thus,  oil  was  cheaper  at  New  York  than  at  Chicago  in 
November,  1887;  in  February  and  August,  1888;  from 
May  to  July,  1889,  and  in  November  of  the  same  year; 
in  September,  1891,  and  from  November  of  the  same 
year  to  January,  1892;  in  January,  May  and  October, 
1893,  and  from  December  of  the  same  year  to  Febru- 
ary, 1894;  in  September  of  the  same  year. 

The  New  York  price  fell  below  the  price  at  Cincin- 
nati in  September  and  October,  1888;  from  August  to 
October,  1889,  and  in  December  of  the  same  year;  in 
February  and  March,  1893;  in  March,  1894;  in  May 
and  June  and  from  August  to  October,  1895. 


368  ECONOMICS 

The  Chicago  price  was  below  that  at  Cincinnati  in 
May,  June  and  September,  1892;  from  April  to 
October,  1895;  in  July,  August  and  October,  1897,  and 
in  ^larch,  1898.  These  fluctuations  cannot  be  adequately 
accounted  for  by  any  other  agency  than  local  fluctua- 
tions of  supply  and  demand. 

In  addition  to  this  study  of  three  important  markets, 
extending  over  a  nimiber  of  years,  the  Industrial  Com- 
mission has  also  a  contemporaneous  survey  of  over 
fifteen  hundred  local  markets,  representing  every  state 
in  the  Union  and  coming  from  towns  of  all  varieties  of 
size  and  characteristics. 

The  information  was  received  in  reply  to  a  schedule 
of  inquiries  which  had  been  addressed  to  retail  dealers 
throughout  the  United  States.  Four  articles  were 
selected,  because  of  the  fairly  uniform  quality  of  the 
product — illuminating  oil,  sugar,  salt  and  Royal  Baking 
Powder — and  the  grocers  were  requested  to  give  the 
prices  paid  on  February  15,  1901,  or  on  the  nearest  day 
when  purchases  of  these  had  been  made.  Taking 
illiuninating  oil,  variation  in  price  may  proceed  from  one 
of  the  following  causes:  (1)  Diff'erence  in  cost  of 
production  at  different  sources  of  supply;  (2)  freight 
rates;  (3)  cost  of  distribution,  which  is  likely  to  be 
in  inverse  ratio  to  the  quantity  sold  in  any  given  market ; 
(4)  cartage,  which  is  presumably  higher  in  a  great  city 
like  New  York  than  in  a  small  hamlet.  The  following 
table  is  constnicteil  from  the  data  of  the  Conmiission, 
with  a  view  to  eliminating  the  first  two  causes  of  varia- 
tion ;  aU  cities  enumerated  in  the  table  are  supplied  by  the 
Standard  Oil  Company  from  the  same  refinery,  located 
at  Whiting,  Indiana.  The  last  colunm  shows  the  net 
price,  after  deducting  freight  charges;  the  cities  are 
arranged  in  the  order  of  their  population; 


THE  TRUST  PROBLEM 


369 


Gross 
Cities  Population  price  Freight       Net  price 

1900  per  gal.         per  gtd.        per  gaL 

San  Francisco,  CaL at2,782  fO.13  $0.05  $0.08 

Louisville,  Ky 204,731  .07  .0074  .0626 

Indianapolis,   Ind 169,164  .055  .005  .05 

Kansas  Citv,  Mo 163,752  .085  .017  .068 

St.  Paul,  Minn 163,065  .08  .013  .067 

Denver,  Col 133,859  .16  .049  .111 

Portland,   Oregon    90,426  .14  .05  .09 

Seattle,  Wash 80,671  .135  j05  .086 

Des  Moines,  Iowa 62,139  .08  .015  .065 

Lincoln,  Xeb 40,169  .10  .019  .081 

LitOe  Rock,  Ark 38,307  .115  J019  .096 

Dubuque,  Iowa  36,297  .09  .0095  .0805 

Madison,   Wis 19,164  .08  .008  .072 

Atchison,   Kan 15,729  .095  .017  .078 

Vicksburg,  Miss 14,834  .095  .015  .08 

Cheyenne,  Wyo 14,087  .16  .049  .111 

Sioux  Falls,  S.  D 10^66  .105  .018  .087 

Fargo,  X.  D 9,589  .125  .03  .095 

It  is  evident  from  this  table  that  neither  the  size  of 
the  market  nor  the  cost  of  carriage  offers  a  satisfactory 
explanation  of  the  variations  in  the  net  prices  of  oil. 
Here  are  two  cities,  Indianapolis  and  Kansas  City, 
substantially  ahke  in  population,  yet  the  price  at  the 
latter  is  36  per  cent  above  that  at  the  former.  Little 
Rock,  Ark.,  and  Dubuque.,  la.,  have  also  substantially 
the  same  population,  and  yet  the  price  at  Little  Rock  is 
1.55  cents  per  gallon  above  that  at  Dubuque.  Vicks- 
burg, ]Miss.,  and  Cheyenne,  Wyo.,  are  also  equal  in  rank, 
and  yet  there  is  a  difference  of  3.1  cents  per  gallon,  or 
nearly  40  per  cent.  In  a  study  of  the  effect  of  trusts 
on  prices.  Professor  Jenks  shows  that  frequently  there 
have  been  verj^  decided  lowerings  of  the  prices  of  trust 
articles  owing  to  vigorous  competition  among  inde- 
pendents, but  that  after  the  source  of  the  price  dis- 
turbance had  been  removed  the  old  prices  were  restored. 

301.  Unfair  contracts  with  retailers. — Under  these 

1—24 


370  ECONOMICS 

contracts  the  trust  constrains  jobbers  and  local  dealers 
to  boycott  the  products  of  other  producers.  Thus  it 
was  claimed  and  admitted  that  the  Eastman  Kodak 
Company  sold  goods  at  15  per  cent  trade  discount  and 
an  additional  discount  of  12  per  cent  to  dealers  who 
handled  only  their  goods.  It  is  claimed  that  the  Tobacco 
Trust  as  well  as  the  Beef  Trust  often  refused  a  retailer 
any  of  its  products  on  the  ground  that  he  handled 
goods  of  competing  concerns.  It  was  brought  out  in 
the  recent  Supreme  Court  case  which  was  decided  against 
the  so-called  Wall  Paper  Trust  that  the  trust  endeavored 
to  stifle  ''competition  by  agreements  as  to  selling  prices, 
which  were  fixed  by  the  directors,  and  by  refusing  to 
sell  to  any  who  cut  the  prices  so  fixed." 

302.  Further  causes  of  popular  hostility  toward  the 
trusts. — While  the  above  constitutes  what  one  may  term 
the  three  main  unfair  advantages  which  the  trust  takes 
of  its  rivals,  they  do  not  explain  all  that  is  popularly  in- 
cluded in  the  so-called  "trust  problem."  The  basis  of 
much  of  the  antagonism  to  the  trust  comes  from :  ( 1 ) 
Its  real  or  fancied  ability  to  charge  extortionate  prices ; 
(2)  its  influence  in  politics;  and  (3)  its  power  to  cor- 
rupt public  officials. 

First,  it  is  generally  conceded  that  trust  prices  are 
somewhat  higher  than  those  that  would  obtain  under 
competitive  conditions.  The  fact  that  the  Standard  Oil 
long  paid  40  per  cent  dividends  would  seem  to  war- 
rant such  a  belief.  Professor  Jenks  in  his  study  of 
prices  comes  to  the  conclusion  that  while  trust  prices 
may  not  be  greatly  in  excess  of  what  would  otherwise  be 
the  case,  they  are  somewhat  higher. 

Second,  that  our  tariff's  are  more  often  the  result 
of  log-rolling  among  the  big  interests  than  the  work  of 


THE  TRUST  PROBLEM  371 

scientific  experts  in  trade  and  commercial  matters  is  a 
subject  of  common  belief  and  at  the  basis  of  much  of  the 
prejudice  toward  the  trusts.  The  tariffs  of  the  past 
have  largely  been  passed  by  those  deriving  the  direct 
benefit  from  them.  Such  possibilities  do  not,  in  the 
nature  of  the  case,  guarantee  anything  like  equal  bene- 
fits to  all  sections  of  the  country,  nor  is  it  likely  to  guard 
the  interests  of  the  consumers  along  with  those  of  the 
producers. 

Third,  the  corruption  of  public  officials  is  not  a 
practice  solely  connected  with  corporations,  but  it  is  a 
matter  of  great  import.  The  dangers  that  lie  in  it  are 
so  great  that  an  aroused  public  opinion  has  forced  the 
political  parties  of  to-day  to  make  public  the  source  of 
their  campaign  contributions,  and  in  certain  states  has 
compelled  the  railroads  to  aboHsh  their  system  of  free 
passes.  The  influence  of  the  railroad  over  political 
affairs  is  so  great  as  to  elicit  the  following  from  the  pen 
of  Professor  Fetter: 

The  wealth  and  industrial  importance  of  the  railroads  give 
them  widespread  political  power  in  other  ways.  It  is  commonly 
charged  in  some  states  that  the  legislature  and  the  courts  are 
"owned"  by  the  railroads.  The  railroads,  in  part  because  they 
are  victims  at  times  of  blackmail  by  dishonest  public  officials,  are 
compelled  in  self-defense  to  maintain  a  lobby.  The  railroad 
lobby,  defensive  and  offensive,  is  in  many  states  the  all-powerful 
"third  house."  Railroads  even  have  their  agents  in  the  pri- 
maries ;  they  enter  political  conventions,  they  dictate  nominations 
from  the  lowest  office  up  to  that  of  the  governor,  and  they  elect 
judges  and  legislators.  The  extent  to  which  this  is  done  differs 
according  as  to  whether  the  railroads  have  large  or  small  inter- 
ests within  the  state.  How  is  this  great  political  problem  to  be 
met  except  by  an  appreciation  of  its  importance  and  by  a  growth 
of  public  integrity  ? 


372  ECONOMICS 

The  following  quotation  from  a  conservative  source  is 
hardly  less  positive: 

Corporate  officials,  moreover,  do  not  hesitate  to  do  things  in 
the  name  and  under  cover  of  their  corporations  which  they  would 
be  ashamed  to  perform  openly  for  themselves.  In  the  United 
States,  corporations  have  been  guilty  of  buying  legislatures,  cor- 
rupting judges,  bribing  juries,  entering  into  agreements  with 
political  parties,  insuring  them  certain  privileges  in  return  for 
campaign  contributions,  and  in  fact,  of  every  sin  of  the  political 
calendar. 

The  recent  Clayton  Act  makes  corporation  officials 
personally  liable  for  the  illegal  acts  of  their  corporations. 
303.  Stock  manipulation. — The  last  vs^ay  which  we 
shall  discuss  in  which  the  corporation  affects  the  interests 
of  the  public  is  in  reference  to  stock  manipulation.  This 
is  a  matter  of  most  far-reaching  consequences.  Yearly 
millions  of  dollars  pass  from  the  hands  of  innocent  in- 
vestors to  swell  the  coffers  of  those  "on  the  inside"  who 
either  know  how  to  manipulate  the  market,  or  else  have 
knowledge  in  their  possession  from  which  the  public  is 
debarred  and  by  which  the  "insiders"  may  profit.  Too 
few  are  the  corporations  whose  securities  are  listed  on 
the  stock  market,  which  issue  financial  statements  from 
which  the  investing  pubHc  can  gain  adequate  knowledge 
for  a  safe  investment.  The  stock  market  is  continually 
subject  to  influences  causing  a  rising  or  falling  market, 
which  periodically  seems  to  reach  a  climax  in  a  panic. 
A  panic,  news  of  bank  failure,  or  sometimes  a 
maliciously  circulated  rumor  starts  the  price  of  stocks 
to  falling.  Those  "on  the  inside"  realize  that  the  time  to 
buy  certain  stocks  is  when,  after  the  stock  market  has 
been  falling  for  some  time,  it  has  about  reached  its 
lowest  point.     The  small  investor — the  man  who  has 


THE  TRUST  PROBLEM  373 

invested  all  his  earnings,  accumulated  after  years  of  toil, 
or  the  woman  who  has  gathered  together  a  few  thousand 
dollars  from  dressmaking,  or  teaching,  and  put  her  all 
into  buying  stocks  which  she  has  every  reason  to  consider 
safe — becomes  frightened  and  sells  for  fear  the  price 
of  the  stock  may  even  go  lower.  If  they  paid  $50  per 
share,  they  may  be  glad  to  throw  it  on  the  market  at 
$25  for  fear  of  being  compelled  later  on  to  accept  $15. 
Meanwhile,  those  on  the  "inside"  knowing  the  intrinsic 
value  of  the  stock,  from  knowledge  which  they  alone 
possess,  and  knowing  that  its  price  is  bound  soon  to  rise 
again,  are  quietly  buying  all  the  stock  they  can  get  their 
hands  on.  Stock  that  formerly  sold  for  $100  they  may 
perhaps  buy  at  $40. 

Then  the  tide  on  the  stock  market  begins  to  turn, 
and  the  prices  begin  gradually  to  climb  up  again. 
Sometimes  it  is  the  result  of  a  general  return  of  pros- 
perity. Sometimes,  on  the  other  hand,  a  fictitious  value 
is  given  to  stock  by  paying  dividends  out  of  earnings 
that  should  have  been  expended  for  renewals  and  re- 
placements, or  through  a  padded  balance  sheet.  On  a 
rising  market  those  "on  the  inside"  gradually  unload 
their  stock  at  double  or  triple  the  price  and  wait  for  the 
next  falling  market  to  buy  back  perhaps  the  same  stock 
at  a  half  or  a  third  of  its  recent  price.  If  one  "on  the 
inside"  puts  a  million  in  stock  on  such  a  deal,  it  only 
requires  a  comparatively  short  time  before  he  has  two 
milHons  in  its  place. 

If  a  corporation  makes  a  million  of  profits  in  a  year 
the  community  has  something  to  show  for  it  in  the  line  of 
railroads  built,  bridges  constructed,  houses  erected,  or 
food  produced;  but  if  those  "on  the  inside"  make  a 
million  in  a  year,  the  community  has  nothing  to  show 


374>  ECONOMICS 

for  it  but  a  number  of  homes  in  which  the  security  of 
old  age  has  been  wiped  away  and  the  present  standard 
of  hving  lowered. 

304.  History  of  trust  legislation, — The  history  of 
legislation  framed  to  correct  the  abuses  on  monopoly 
power  on  the  part  of  industrial  combinations  resembles 
the  record  of  acts  passed  to  curb  the  growing  strength 
of  the  railroads.  In  both  cases  state  action  preceded 
federal  action,  and  repeated  amendments  to  the  national 
law  have  been  urged  or  passed. 

The  first  anti-trust  laws  were  those  passed  by  the 
various  states;  Kansas  took  the  lead  by  passing  a  law 
against  business  corporations  in  1889.  She  was  joined 
by  a  small  number  of  states  the  same  year.  In  the  first 
half  of  1890  three  more  states  joined  the  movement. 
In  July  of  that  year  the  Federal  Anti-Trust  Act,  pop- 
ularly known  as  the  Sherman  Law,  was  passed.  Since 
then  many  states  followed  the  examples  of  their  sis- 
ters, and  of  the  federal  government,  and  passed  anti- 
trust laws  until  upward  of  thirty  legislatures  have 
passed  laws  on  the  subject.  These  various  state  meas- 
ures were  similar  in  most  respects  in  that  they  made 
persons  engaged  in  any  combination  in  restraint  of 
trade  liable  to  fine  and  imprisonment,  and  the  corpo- 
rations or  firms  punishable  by  loss  of  charter  or  of 
right  to  carry  on  business  within  the  state  where  the 
offense  is  committed.  The  United  States  Supreme 
Com*t  held  that  these  laws,  applied  to  any  combinations, 
whether  they  formed  a  partial  or  complete  monopoly, 
were  decidedly  inequitable.  It  is  now  pretty  generally 
conceded  that  these  state  laws  failed  in  being  too 
drastic.  If  they  had  been  enforced  to  the  full  letter  of 
the  law,  much  business  would  have  been  paralyzed. 

305.  The  Sherman  Anti-Trttst  Act. — The  Sherman 


THE  TRUST  PROBLEM  376 

Act  of  1890  declares  that  "every  contract,  combination 
in  the  form  of  a  trust  or  otherwise,  or  conspiracy  in  re- 
straint of  trade,  or  commerce  among  the  several  states  or 
with  foreign  nations,  is  illegal,"  and  that  "every  person 
who  shall  monopolize  or  attempt  to  monopohze,  or  com- 
bine or  conspire  with  any  other  person  to  monopolize, 
any  part  of  the  trade  or  commerce  among  the  several 
states  or  with  foreign  nations,  shall  be  deemed  guilty 
of  a  misdemeanor,  and  on  conviction  thereof  shall  be 
punished  by  fine  not  exceeding  $5,000  or  by  imprison- 
ment not  exceeding  one  year,  or  both  said  punishments 
in  the  discretion  of  the  court." 

306.  Enforcement  of  the  Sherman  Act. — Because  the 
legislative  authority  in  the  United  States  is  organized 
on  a  dual  system  of  National  and  state  sovereignties,  the 
Sherman  Anti-Trust  Act,  although  intended  to  prevent 
industrial  combinations,  was  at  first  effectively  applied 
only  in  the  case  of  railroads  and  trade  unions. 
The  notable  instance  of  this  latter  was  the  sup- 
pression of  the  Chicago  Railroad  strike  in  1894, 
under  the  provisions  of  the  Federal  Anti-Trust  Act. 
This  peculiar  situation  arises  from  two  facts:  First, 
that  under  the  Constitution  of  the  United  States  Con- 
gress has  control  over  the  commerce  between  the  states. 
Interstate  commerce  is  interpreted  by  the  United  States 
Supreme  Court  as  "intercourse  and  traffic  between  the 
citizens  or  inhabitants  of  different  states,"  including 
"not  only  the  transportation  of  persons  and  property, 
but  also  the  purchase,  sale,  and  exchange  of  com- 
modities." By  the  terms  of  the  Constitution,  the  states 
are  barred  from  any  attempt  at  the  regulation  of 
interstate  commerce.  Second,  that  under  the  court's 
definition  of  interstate  commerce,  the  business  of  manu- 
facturing is  not  included.     In  so  far  as  the  trust  is 


376  ECONOMICS 

usually  a  manufacturing  concern,  this  important  part  of 
its  activities  comes  under  jurisdiction  of  state  authority. 
As  engaging  in  interstate  commerce,  the  trust  is 
amenable  to  the  federal  government;  as  a  manufactur- 
ing concern  it  is  amenable  to  the  state  only  in  which  it  is 
located.  This  situation  has  made  it  difficult  for  Con- 
gress to  exercise  any  efficient  control  over  the  trusts. 
The  interstate  commerce  in  which  they  are  engaged  and 
over  which  the  Constitution  gives  Congress  control,  may 
be  so  carried  on  as  to  evade  practically  any  prohibition 
that  Congress  could  make  without  putting  a  serious 
check  on  all  interstate  commerce. 

The  states,  on  the  other  hand,  are  almost  as  powerless, 
for  although  they  can  control  the  manufacturing  of 
trust  products  within  their  domains,  they  cannot  prevent 
trusts  organized  under  the  laws  of  other  states,  and 
having  their  plants  outside  of  the  states,  from  shipping 
their  products  into  the  state.  If  they  attempted  this 
they  would  be  interfering  with  interstate  commerce, 
which  is  strictly  prohibited  by  the  Constitution  of  the 
United  States.  Furthermore,  outside  the  question  of 
legality,  any  plan  of  control  which  rested  on  state  action 
would  probably  have  the  weakness  of  a  lack  of  uni- 
formity. A  chain  is  no  stronger  than  its  weakest  link, 
and  so  any  series  of  laws  passed  by  the'  various  states 
would  be  no  more  efficient  than  the  regulation  in  the 
weakest  state.  This  is  at  present  a  problem  that  has  not 
yet  been  solved.  A  state  may  so  liberalize  its  corpora- 
tion laws  as  to  afford  a  veritable  asylum  for  certain 
trusts;  it  may  even  authorize  the  corporation  to  do 
business  in  every  state  in  the  Union  except  its  own,  and 
render  other  states  powerless  to  keep  out  its  products, 
since  such  an  attempt  might  constitute  an  interference 
with  interstate  commerce.     The  states  with  the  most 


THE  TRUST  PROBLEM  377 

indulgent  policies  have  been  New  Jersey,  Delaware  and 
West  Virginia.  The  usual  inducements  which  were  held 
out  consist  of  light  incorporation  fees  and  taxes,  the 
absence  of  specifications  as  to  character  of  business  or 
amount  of  capital  stock.  Probably  90  per  cent  of  exist- 
ing corporations  hold  charters  granted  by  one  of  these 
three  states.  Gradually,  however,  the  condition  of  trust 
control  is  being  improved  by  legislation.  An  important 
step  forward  was  taken  when  the  Department  of  Com- 
merce and  Industry  was  created  in  1903. 

807.  The  Bureau  of  Corporations. — This  new  de- 
parture in  the  line  of  corporation  control  aims  at  correct- 
ing certain  trust  abuses  through  publicity.  Under  the 
above-mentioned  department  is  the  Bureau  of  Corpora- 
tions, which  is  charged  "to  make  diligent  investigation 
into  the  organization,  conduct  and  management,  of  the 
business  of  any  corporation,  joint  stock  company,  or  cor- 
porate combination  engaged  in  commerce  among  the 
several  states  or  with  foreign  nations,  excepting  common 
carriers  .  .  .  and  to  gather  such  information  and 
data  as  will  enable  the  President  of  the  United  States  to 
make  recommendation  to  Congress  for  legislation  for  the 
regulation  of  such  commerce." 

At  the  head  of  this  bureau  stands  the  Commissioner  of 
Corporations,  who  may  subpoena  witnesses  and  exam- 
ine whatever  books  and  papers  of  the  trusts  are  neces- 
sary for  him  to  perform  the  functions  of  his  office. 
Among  the  things  which  this  department  of  govern- 
ment has  accomplished  are  a  Report  on  the  Beef  In- 
dustry, and  the  investigation  of  the  Transportation  of 
Petroleum.  The  establishment  of  the  Federal  Trade 
Commission  is  the  latest  effort  to  exercise  supervision 
of  that  nature. 

308.  Future  of  the  trust  problem. — It  may  not  be  out 
of  place  to  note  that  the  field  of  possible  future  legisla- 


378  ECONOMICS 

tion  is  narrowed  down  to  three  distinct  propositions. 
First,  there  is  incorporation  under  federal  law.  Such 
a  law  would  have  to  be  purely  voluntary,  but  it  is  held 
that  enough  inducements  in  the  line  of  legal  privileges 
and  immunities  could  be  held  out  to  cause  all  future 
corporations  to  take  out  federal,  instead  of  state 
charters,  and  to  cause  many  now  incorporated  under 
state  laws  to  change  their  charters.  The  second  plan  is 
similar  to  the  first.  It  proposes  a  federal  franchise  or 
license  for  permission  to  engage  in  interstate  commerce. 
Prohibiting  such  commerce  to  all  unauthorized  corpora- 
tions would  practically  bring  all  those  of  any  magnitude 
under  federal  supervision. 

The  third  plan  proposes  reasonable  publicity.  The 
advocates  of  this  plan  see  in  publicity  a  means  of  re- 
vealing the  existence  of  abnormal  income,  or  other  con- 
ditions now  kept  from  the  investing  public.  The 
establishment  of  the  United  States  Bureau  of  Corpora- 
tions and  the  Federal  Trade  Commission  has  been  im- 
portant steps  in  that  direction.  Many  feel  that  infor- 
mation thus  gathered  should,  within  reasonable  limits, 
be  open  to  the  public  as  well  as  to  the  President  of  the 
United  States.  One  thing  is  certain,  to  the  future  be- 
longs the  task  of  passing  laws  that  are  adequate  to 
solve  the  important  questions  which  the  corporation 
and  trust  have  brought  us. 

The  recent  Clayton  Bill  (see  Appendix,  Vol.  XII) 
in  several  important  points  modifies  the  powers  of 
holding  companies,  just  as  it  lessens  the  tendency  to- 
ward the  creation  of  monopolies. 


CHAPTER  IV 

PROBLEM  OF  MONOPOLY 

309.  Nature  of  monopoly. — One  of  the  most  interest- 
ing  problems  of  economics,  as  well  as  one  on  which  there 
is  the  greatest  difference  of  authoritative  opinion,  is  that 
of  monopoly.  The  problem  of  the  trust  and  that  of 
monopoly  should  not  be  confused  in  thought  as  identical. 
Though  they  usually  go  hand  in  hand,  one  may  exist 
without  the  other.  Monopoly  is  the  broader  term  of  the 
two  and  applies  equally  to  the  power  by  which  labor 
unions  are  able  to  force  up  wages  as  well  as  to  the  power 
which  enables  railroads  "to  charge  what  the  traffic  will 
bear"  or  the  trust  to  reap  monopoly  profits. 

In  the  popular  mind,  monopoly  is  an  evil  to  be 
destroyed  whenever  met.  It  is  quite  generally  believed 
that  the  unrestricted  exercise  of  monopoly  power  can  not 
but  result  in  social  injury.  Its  presence  suggests  some 
form  of  exploitation.  This  view  is  furthermore  not 
limited  to  the  lay  mind.  In  the  eyes  of  some  economists 
of  note  "monopoly  checks  progress  in  production  and 
infuses  into  distribution  an  element  of  robbery."  In 
their  eyes  monopoly  is  like  some  foreign  substance  which 
may  get  into  the  industrial  mechanism  and  prevent  its 
perfect  running.  Whenever  this  happens  the  only  wise 
course  is  to  remove  the  cause  of  such  friction.  This  can 
only  be  done  by  restoring  once  more  a  condition  of  free 
competition.  By  this  method,  industry  is  once  more 
restored  to  its  normal  condition.  Economists  who  hold 
this  view  of  monoply   believe  that  there  are  certain 

879 


380  ECONOMICS 

fundamental  laws  in  economics  which  are  as  miiversal 
and  permanent  as  the  law  of  gravitation  itself.  They 
maintain  that  these  laws  should  be  allowed  to  operate 
unimpeded  by  any  distributing  forces  such  as  monopoly 
and  that  if  they  are  allowed  so  to  operate,  each  factor  in 
production  will  get  its  just  share  of  the  products  of 
industry.  Such  theory  of  distribution  is  based  on  a  be- 
lief in  a  natural  law  of  justice  which  rewards  every 
man  according  to  his  merits.  It  implies  a  complete 
absence  of  all  forms  of  monopoly.  Under  such  a 
system,  the  only  prices  which  it  is  just  to  charge  either 
for  services  or  commodities  are  "cost"  prices,  i.  e.,  prices 
in  which  there  is  no  monopoly  element. 

310.  Monopoly  a  universal  phenomenon. — Those  who 
oppose  this  general  view  of  monopoly  contend  that  there 
is  nothing  inherently  wrong  in  the  principle  of  mo- 
nopoly, that  it  is  a  general  phenomenon  of  all  economic 
activities  and  that  practically  everybody,  laborer,  pro- 
fessional man,  capitalist  and  landlord,  is  a  monopolist. 
In  their  view,  monopoly  is  the  power  which  enables  a 
man  to  raise  the  price  of  his  services  or  his  commodities 
above  that  which  they  "cost"  him.  A  monopolist  is, 
therefore,  any  one  who  fixes  his  price  solely  with  his  eye 
on  the  market,  who  sells  without  having  in  view  any  other 
consideration  than  his  own  interest,  in  other  words,  one 
who  "charges  what  the  traffic  will  bear."  Under  this 
definition  of  monopoly  the  corner  grocer  who  adds  a  few 
extra  pennies  to  the  price  of  his  articles,  because  he 
knows  that  his  customers  will  pay  it  rather  than  go  four 
or  five  blocks  elsewhere,  is  as  much  a  monopolist  as  a 
coal  baron.  They  are  monopolists  in  kind,  if  not  in 
degree.  According  to  this  view,  practically  every  one  is 
a  monopolist.  Though  the  extreme  concentration  of 
monopoly  power  in  the  hands  of  some  may  give  rise  to 


PROBLEM  OF  MONOPOLY  381 

serious  problems,  the  monopoly  principle,  nevertheless, 
pervades  the  whole  business  world,  and  is  not  to  be  con- 
demned on  all  hands  because  it  may  sometimes  give  rise 
to  evil  results. 

311.  Monopoly  accompanies  progress, — According  to 
this  school  of  thought,  monopoly  is  an  inevitable  result 
of  progress,  and  civilization.  This  truth  can  best  be 
seen  by  showing  the  relation  existing  between  the 
monopoly  fund  and  the  social  surplus.  One  hundred 
and  fifty  years  ago,  before  the  great  Industrial  Revolu- 
tion in  England,  man's  productive  power  was,  relatively 
speaking,  very  small.  With  the  great  inventions  of  that 
period  and  those  subsequently  made,  with  the  discoveries 
of  steam  and  electric  power,  and  their  application  to 
industry,  with  these  and  Hke  improvements  in  the  arts 
and  sciences,  man's  productive  power  has  been  multiplied 
from  ten  to  a  hundred  fold.  With  the  same  amount  of 
capital  expressed  in  terms  of  dollars  and  cents,  and 
the  same  amount  of  human  effort  man  can  to-day 
produce  a  hundred  units  of  product  where  formerly  he 
produced  but  ten.  The  difference  in  the  productive 
capacity  of  the  two  periods  is  the  result  of  the  growth 
of  the  social  surplus.  If  all  the  products  of  industry 
to-day  were  apportioned  among  all  the  persons  who 
were  responsible  for  their  creation,  no  small  amount 
would  have  to  go  to  the  inventors,  discoverers  and  others 
of  the  past  who  have  so  largely  made  possible  our  pres- 
ent high  productive  power.  In  the  words  of  Mr.  Car- 
negie, in  a  recently  published  essay  on  "Wealth":  "In 
the  world's  progress,  scientific  discoverers  and  mechan- 
ical inventors  appeared  and  adapted  the  forces  and 
materials  of  nature  to  the  uses  of  man,  followed  by 
the  commercial  and  industrial  age  in  which  we  live,  in 
which  wealth  has  been  produced  as  if  by  magic,  and 


382  ECONOMICS 

fallen  largely  to  the  captains  of  industry,  greatly  to 
their  own  surprise.  Multi-millionaires,  a  new  genus, 
have  appeared,  laden  with  fortunes  of  such  magnitude 
as  the  past  knew  nothing  of." 

It  has  been  almost  the  universal  rule  of  history  that 
the  great  benefactors  of  mankind,  the  inventors  and 
discoverers,  have  died,  with  few  exceptions,  poor  men. 
Much  of  the  present  wealth  produced  is  in  reality  due 
to  the  past,  but  the  past  is  gone  and  it  is  therefore  not 
in  a  position  to  present  a  claim  on  the  present  products 
of  industry  as  just  as  such  a  claim  might  be.  The 
present  wealth  can  only  be  consumed  by  the  present 
participants  in  production.  This  means  that  every  one 
who  is  getting  some  of  the  product  of  this  social  surplus 
is  in  reaUty  getting  something  for  which  he  has  not 
rendered  an  equivalent  service.  In  so  far  he  is  a  monop- 
olist because  he  has  departed  from  the  standard  of  "cost" 
prices.  The  social  surplus  affords  thus  a  kind  of 
monopoly  fund  on  which  all  the  present  factors  of  pro- 
duction are  constantly  drawing.  One  group  of  capital- 
ists tries  to  increase  the  share  of  this  fund  which  it 
receives  by  forcing  up  the  price  of  its  particular  com- 
modity. If  they  succeed,  another  group  of  monopolists 
must  lose  some  of  the  share  which  they  formerly  got. 
If  labor  is  able  to  combine  and  successfully  raise  their 
wages  they  are  increasing  the  share  of  this  monopoly 
fund  that  they  receive  and  some  other  group  of  monop- 
olists suffer  a  corresponding  loss. 

Thus,  it  is  contended,  monopoly  is  never  destroyed 
but  merely  shifted  from  one  group  to  another  or  divided 
between  them  on  a  new  basis.  It  by  no  means  follows 
that  if  railroads  were  forced  to  reduce  their  freight 
rates  to  the  lowest  possible  level  that  the  price  of  com- 
modities transported  would  fall  as  a  result,  or  that 


PROBLEM  OF  MONOPOLY  383 

monopoly  would  be  destroyed.  A  fall  in  freight  rates 
would  merely  result  in  an  increase  in  the  value  of  western 
farm  lands.  Part  of  the  income  of  society  would 
thereby  be  shifted  from  one  monopoly,  the  railroad,  to 
another  monopoly,  the  landowner  or  landlord.  Or,  to 
take  another  illustration  of  the  same  principle,  if  the 
fare  on  trolleys  running  into  a  suburban  district  is  low- 
ered, it  by  no  means  follows  that  a  man  renting  a  house 
in  the  suburbs  will  be  any  better  off  financially  at  the 
end  of  the  month.  Because  of  the  lowered  fares,  his 
section  of  the  country  now  becomes  more  desirable  for 
homes.  Rents  increase  and  instead  of  paying  an  extra 
dollar  or  two  to  the  railroad  monopoly,  he  now  pays  it 
to  his  landlord. 

One  thus  comes  to  see  that  monopoly  power  is  well 
nigh  universal.  There  are  but  few  classes  of  society, 
nay,  rather  few  individuals  in  any  class,  who  have  not 
been  able  to  get  and  to  keep  some  portion  of  the  social 
surplus. 

312.  One  monopoly/  feeds  on  another. — ^We  may  now 
clearly  see  the  nature  of  the  monopoly  problem.  Cer- 
tain classes  in  the  community  have  obtained  more  of 
the  social  surplus  than  others.  This  they  have  obtained 
through  the  larger  control  which  they  exert  over  supply, 
that  is  to  say,  through  their  superior  monopoly  power. 
The  American  Sugar  Refining  Company,  or  the  Amer- 
ican Tobacco  Company,  or  the  Standard  Oil  Company 
obtains  an  advantage  over  Michael  Hertzka,  coal  miner, 
because  it  can  exercise  a  larger  control  over  the  supply 
of  its  commodities  than  Michael  Hertzka  can  exert  over 
the  supply  of  his  labor,  and  can,  therefore,  maintain  a 
higher  net  income  from  selling  sugar,  tobacco,  or 
petroleum  than  Hertzka  can  obtain  from  selling  his 
labor. 


384  ECONOMICS 

In  times  of  depression,  when  the  social  purchasing 
power  is  reduced,  the  great  companies  can  reduce  their 
output,  and  maintain  the  price  of  their  products  at  a 
higher  level  than  the  price  of  the  labor  of  the  coal-miner, 
which  may,  at  such  a  time,  entirely  vanish.  In  the  same 
way,  when  prosperity  returns,  and  the  social  income 
increases,  the  price  of  sugar,  tobacco  and  oil  rises  much 
more  quickly  and  much  higher  than  the  wages  of  the 
coal-miner.  In  this  way,  by  their  superior  control  over 
supply,  the  industrial  combinations  take  from  the  la- 
borer, the  farmer,  the  small  artisan,  the  man  on  a  salary 
— from  every  man  whose  control  over  the  supply  of 
labor  or  goods  is  less  absolute  than  theirs — a  part  of 
the  free  income  which  these  factors  would  obtain  but  for 
the  fact  that,  as  compared  with  the  trusts,  their  control 
over  the  supply  is  feeble  and  ineffective. 

313.  Some  would  apportion  the  social  surplus  by 
law. — Many  serious  students  of  the  problem  feel  that 
there  can  be  no  equalizing  of  the  distribution  of  the 
social  surplus  without  calling  on  the  government  to  set 
things  right  by  establishing  "cost"  prices.  They  ac- 
cordingly advocate  giving  to  the  Interstate  Commerce 
Commission  or  some  like  body  the  rate-making  power 
over  the  railroad  so  that  "cost"  prices  for  transporta- 
tion may  obtain  and  all  railroad  stock  dividends  arising 
from  monopoly  power  be  prevented.  They  likewise 
believe  that  there  is  a  "natural  law"  for  all  wages  and 
that  the  government  should  ascertain  this  natural  wage 
by  arbitration  commissions.  "The  state  is  bound  to 
ascertain  and  declare  what  rate  is  just,  to  confirm  the 
workers  in  their  positions  when  they  accept  it,  and  to 
cause  them  to  forfeit  their  right  of  tenure  if  they 
refuse  it.  If  the  workers  thus  forfeit  their  claim, 
their  positions  are  clearlj^  open  to  whoever  will,  take 


PROBLEM  OF  MONOPOLY  385 

them,  and  the  state  is  bound  to  protect  the  men  who 
do  this." 

314.  Objections  to  government  regulation  of  prices. 
— Those  who  take  the  opposing  view  of  monopoly  feel 
that  it  is  illogical  for  the  government  to  establish  prices 
on  a  "cost"  basis  in  some  cases  and  not  generally.  They 
point  out  that  there  are  at  least  four  classes  of  property 
that  gain  a  relatively  large  share  of  the  social  surplus, 
namely,  the  railroads,  protected  industries,  western 
farms  and  city  land.  Why  not  be  logical  and  have 
the  government  establish  "cost  prices"  for  at  least  these 
four  groups?  But  herein  lies  the  weakness  of  the  whole 
scheme  of  government  regulation.  To  carry  out  the 
principle  of  "cost"  prices  to  anj^thing  like  its  logical 
extent  means  a  task  too  big  and  too  complex  to  be 
considered  for  a  moment.  It  is  wiser  to  recognize 
monopoly  as  a  general  phenomenon  not  necessarily  an 
evil  in  itself,  but  capable  of  leading  to  evil.  Instead 
of  destroying  the  strong  monopolists,  the  aim  should 
be  to  strengthen  the  weaker  ones  so  that  they  may  get 
their  share  of  the  social  surplus.  Instead  of  saying 
to  the  railroads  and  the  farmers,  "you  shall  each  receive 
such  and  such  returns,"  it  is  more  practical  to  allow 
them  to  adjust  the  matter  between  themselves.  Instead 
of  saying  to  labor,  "you  shall  receive  such  and  such  a 
wage,  guaranteed  to  you  by  law" — it  is  wiser  to  en- 
courage them  to  increase  their  monopoly  power  by  more 
thorough  unionization  and  thus  get  in  line  for  their 
share  of  the  social  surplus.  The  whole  problem  is  essen- 
tially one  of  equalizing  monopoly  power. 

315.  The  interest  of  consumers  in  prices. — It  may  be 
asked,  has  not  the  general  public,  or  at  least  the  con- 
sumer's interests,  been  ignored  in  such  a  view  of  the 
case?     Are  there  no  restraints  in  operation  to  protect  his 

1—25 


386  ECONOMICS 

interests?  There  is  a  general  protection  in  the  fact  that 
monopolies  feed  on  each  other,  so  to  speak.  If  one 
monopoly  gains,  another  loses.  In  addition  to  this, 
there  are  other  limitations  on  the  power  of  monopoly: 
(1)  The  extension  of  the  principle  of  combination  to 
include  every  industry  and  all  occupations — the  univer- 
salization  of  the  tendency  to  consolidation;  and  (2)  the 
substitution  of  one  good  for  another,  an  advance  in 
price  being  met  by  a  change  in  the  direction  of  demand. 
Thfe  trust  movement  of  recent  years,  which  has  con- 
solidated the  industries  of  mining  and  manufacturing, 
should  not  be  deplored  as  a  social  disaster.  It  should 
be  hailed  rather  as  a  social  gain,  for  it  has  meant  a 
closer  approach  to  an  equality  of  monopoly  power.  In 
these  lines  before  the  inception  of  the  trust  movement, 
firms  and  companies  were  to  be  found  widely  diiFering 
in  their  capacity  for  economical  production.  The 
stronger  concerns  with  the  best  plants  and  the  latest 
improvements  enjoyed  a  considerable  advantage  over 
their  weaker  competitors.  Charging  the  same  price, 
they  were  able,  through  their  lower  cost  of  production, 
to  make  a  large  profit,  in  short,  to  get  for  themselves 
a  disproportionate  share  of  such  monopoly  profits  as 
accrued  to  the  industry  to  which  they  belonged.  The 
inclusion  of  all  these  plants,  both  small  and  great,  under 
the  consolidation  of  a  trust,  has  tended  to  equalize  this 
advantage  and  to  distribute  more  widely  the  increment 
of  monopoly  gains.  The  growth  of  industrial  com- 
bination, so  far  from  concentrating,  has  more  widely 
diffused  the  power  of  monopoly,  and  has  equalized  the 
economic  advantages  which  arise  from  its  possession. 
Producers  who  were  formerly  sufferers  from  monopoly 
power  have  now  been  permanently  relieved.  They  have 
been  taken  into  the  inner  circle,  and  have  been  admitted 


PROBLEM  OF  MONOPOLY  887 

to  a  share  of  monopoly  power  which,  under  the  regime 
of  free  competition,  they  could  not  have  obtained. 

316.  The  consumer  may  also  he  a  stockholder. — It 
may  be  contended,  however,  that  the  gains  to  producers 
from  the  organization  of  the  trusts  have  been  offset  by 
the  losses  which  the  consumers  have  suffered.  On  the 
one  side,  stand  the  manufacturers  and  mine  owners,  a 
comparatively  small  body,  firmly  organized  into  large 
consolidations.  On  the  other  side  are  found  the  work- 
ingmen,  the  farmers,  and  the  professional  men — ninety- 
nine  out  of  every  hundred  of  the  population.  These 
are  the  consumers,  and  it  is  from  them  that  the  social 
surplus  is  extorted.  Here,  it  is  claimed,  is  the  real 
menace  of  the  trust. 

The  consumer,  however,  has  other  safeguards  against 
the  power  of  monopoly.  Owing  to  the  corporate  form 
which  all  industries  have  now  assumed,  and  to  the  growth 
of  the  investment  habit,  he  may,  as  a  stockholder,  par- 
ticipate in  the  monopoly  gains  from  which,  as  a 
consumer,  he  may  suffer.  The  wide  diffusion  of 
corporation  securities  is  a  phenomenon  whose  existence 
is  not  generally  known,  but  which  comes  to  the  surface 
in  an  unmistakable  way  whenever  hostile  legislation 
threatens  corporate  profits.  In  Philadelphia,  for  ex- 
ample, it  is  estimated  that  fully  50,000  voters  are  stock- 
holders in  the  municipal  monopolies  of  that  city. 
Probably  one-fourth  of  the  people  of  Philadelphia  are 
directly  interested  in  the  monopoly  profits  to  which,  as 
consumers,  they  contribute.  The  same  policy  has  long 
been  pursued  by  the  railroads,  which  have  been  ma- 
terially assisted  by  the  savings  fund  institutions,  par- 
ticularly in  the  state  of  New  York,  where  savings  banks 
and  trust  companies  are  allowed  to  invest  their  funds 
in  approved  corporation  securities. 


888  ECONOMICS 

The  advocates  of  state  socialism  would  do  well  to 
look  about  them.  While  they  advocate  the  ownership 
of  natural  monopolies  by  the  people,  the  people  have 
it  in  their  power  to  take  possession  as  individuals, 
through  the  purchase  of  corporate  securities.  This 
movement  toward  public  ownership — for  such  in  fact  it 
is — will  progress  with  the  general  increase  in  incomes; 
and  in  this  way  the  gains  of  monopoly  will  be  diffused 
among  an  ever-widening  circle  of  shareholders.  Again 
must  the  trust  movement  be  commended;  because,  by 
bringing  all  manufacturing  industry  into  the  corporate 
form,  and  hence,  imparting  to  its  future  a  strength  and 
stability  which  isolated  heterogeneity  would  never  have 
allowed,  it  has  admitted  the  whole  people  to  share  in 
monopoly  profits.  As  consumers,  their  free  income 
may  be  taken  from  them  in  the  price  of  commodities; 
but  this  is  straightway  handed  back  to  them  in  the  form 
of  dividends. 

Not  only  as  shareholders  in  existing  monopolies  may 
the  consimiers  be  compensated  for  the  loss  of  their  free 
income,  but  as  producers,  they  may  form  organizations 
to  dispute  for  its  possession,  and  force  a  more  equal 
division.  The  possibilities  of  consolidation  are  almost 
infinite. 

317.  The  problem  is  to  universalize  monopoly  power. 
— The  universalization  of  monopoly  power,  and,  by  con- 
sequence, a  closer  approach  to  equality  of  monopoly 
advantage,  is  already  in  sight.  When  all  producers  are 
closely  organized  the  supply  of  every  commodity  will  be 
firmly  controlled.  What  is  taken  from  the  laboring 
man  in  the  price  of  oil,  sugar  and  coffee,  will  be  restored 
to  him  in  a  higher  rate  of  wages.  What  the  farmer 
loses  in  the  price  of  barbed  wire  and  binding  twine,  will 
be  restored  to  him  in  the  price  of  wheat.    When  all 


PROBLEM  OF  MONOPOLY  389 

the  productive  factors  stand  on  an  equal  footing,  no 
one  will  be  able  to  gain  any  considerable  advantage  over 
any  other.  This  monopoly  power  will  never  be  equally 
distributed.  To  expect  this  would  be  visionary.  But 
conclusive  evidence,  accumulating  on  every  hand  and  in 
every  industry,  points  to  the  conclusion  that  the  solution 
of  the  problem  lies  not  in  the  abolition  or  even  the  cur- 
tailment of  monopoly  power,  but  in  its  general  distri- 
bution throughout  all  classes  of  society. 

318.  The  power  of  substitution. — But  the  consumer 
need  not  rely  upon  these  means  of  protection  against 
the  power  of  monopoly.  He  has  a  more  effective 
remedy  constantly  at  hand,  in  the  power  of  substitution 
— a  remedy  whose  application,  though  requiring  a 
modicum  of  intelligence,  is  instantly  effective.  The 
sympathetic  movement  of  prices  has  long  been  clearly 
perceived.  The  prices  of  wheat,  corn  and  oats  move 
together,  no  matter  in  which  grain  the  initial  disturbance 
of  the  supply  and  demand  relation  may  have  occurred. 
The  prices  of  all  products  which  are  interchangeable  in 
their  uses  fall  in  unison. 

The  application  of  this  law  of  the  sympathetic  price 
movement  of  substitutes  has  not  been  made  to  the  prob- 
lem of  monopoly,  yet  its  application  is  plain  and  obvious. 
Let  us  proceed  by  illustration.  The  monopoly  of  the 
anthracite-coal  industry  has  been  already  referred  to. 
From  1880  to  1898,  while  general  prices  fell  40  per  cent, 
the  price  of  anthracite  coal  at  Philadelphia  declined  from 
$4.53  to  $3.75  or  17  per  cent.  The  consumer  was  taxed 
more  and  more  heavily  by  the  coal  trust.  How  did 
he  escape  from  this  situation?  By  the  use  of  bituminous 
coal.  The  almost  unlimited  area  of  soft  coal  land 
enabled  the  supply  to  be  increased  at  will.  During 
this  same  period,  1880-1898,  the  price  of  bituminous 


390  ECONOMICS 

coal  in  the  United  States  decreased  from  $3.75  to  $1.60 
per  ton,  or  60  per  cent,  the  result  of  an  increase  in  its 
supply  from  38,200,000  tons  in  1880  to  148,700,000 
tons  in  1898,  an  increase  in  per  capita  consumption  of 
from  .76  tons  in  1880  to  2  tons  in  1898.  During  the 
same  period  the  production  of  anthracite  coal  increased 
only  from  25,500,000  tons  in  1880  to  47,600,000  tons  in 
1898,  an  increase  in  per  capita  consumption  of  from 
.5  ton  in  1880  to  .6  ton  in  1898,  or  20  per  cent  as  com- 
pared with  an  increase  in  the  per  capita  consumption 
of  bituminous  coal  of  163  per  cent. 

In  other  words,  during  this  period  of  18  years,  the 
per  capita  consumption  of  bituminous  coal  increased 
eight  times  as  rapidly  as  the  consumption  of  anthracite. 
A  constantly  increasing  proportion  of  the  population 
have  abandoned  or  decreased  their  consumption  of  the 
monopolized  fuel  in  favor  of  a  cheaper  substitute. 
Along  the  same  line  has  come  the  substitution  of  crushed 
coke  for  anthracite  coal,  and  the  use  of  gas  and  petro- 
leum as  fuel.  No  better  illustration  of  the  eiFectiveness 
of  the  power  of  substitution  to  curb  the  power  of  mo- 
nopoly could  be  asked  for. 

319.  The  power  of  substitution  and  the  price  of  oil. — 
The  Standard  Oil  Company  is  a  monopoly.  It  has  al- 
most absolute  control  over  the  price  of  refined  petroleum, 
and  can  fix  its  price  at  the  point  of  largest  monopoly 
revenue.  But  this  power  can  only  be  exercised  to  the 
fullest  extent  in  the  country  and  in  the  smaller  towns. 
On  approaching  a  gas  tank  or  an  electric  light  plant, 
the  price  of  oil  at  once  declines.  The  general  substitu- 
tion of  gas  for  oil  depends  merely  on  the  continuance 
of  the  growth  of  towns  into  cities  and  of  hamlets  into 
towns.  Soft  coal  is  everywhere  abundant,  and  gas  can 
be  manufactured  at  a  low  price.     A  few  companies,  like 


PROBLEM  OF  MONOPOLY  391 

the  United  Gas  Improvement  Company  of  Philadel- 
phia, have  consciously  adopted  this  pohcy  of  substitu- 
tion, and  are  rapidly  introducing  gas  as  a  substitute 
for  anthracite  coal  and  petroleum. 

During  one  of  the  recent  occasions  when  the  price  of 
meat  soared  to  heights  that  were  prohibitive  for  a  great 
many  families,  so  many  persons  reduced  their  daily  con- 
sumption of  meat  by  substituting  other  articles  of  diet 
for  it,  that  the  Beef  Trust  suffered  a  loss  never  to  be 
made  up  again.  People  came  to  see  that  they  could  get 
along  on  a  diet  in  which  meat  did  not  figure  three  times 
a  day  and  still  keep  well,  and  now  when  prices  soar, 
the  diet  of  the  average  person  adapts  itself  accordingly. 

Examples  of  the  power  of  substitution  could  be 
indefinitely  multiplied.  The  price  of  wool  is  a  mo- 
nopoly price,  from  whose  incidence  there  seemed  to  be 
no  way  of  escape;  yet  a  recent  estimate  of  the  National 
Association  of  Wool  Manufacturers  states  that  the  per 
capita  consumption  of  wool  in  the  grease  has  decreased 
from  9.07  pounds  in  1890  to  6.7  pounds  in  1900,  and  to 
6.4  in  1910,  due  to  substitution  of  cotton.  The  monopoly 
of  the  copper  trust  is  threatened  by  the  solution  of  the 
problem  of  leaching  copper  direct  from  the  ore,  without 
the  long  and  expensive  operations  of  roasting  and  smelt- 
ing, which  confine  production  to  a  comparatively  small 
area  of  high-grade  ores  easy  to  be  controlled. 

There  is  no  need  of  further  illustration.  No  mo- 
nopoly is  secure  in  its  control,  for  no  monopoly  can  be 
protected  against  the  power  of  substitution.  Until 
bounds  are  set  to  the  power  of  invention,  and  until  the 
possibilities  of  natural  resources  are  strictly  limited,  we 
can  never  be  in  serious  danger  from  the  tax  of  monop- 
oly prices.  It  is  true  that  the  exercise  of  this  power 
of  substitution  implies  a  degree  of  discernment  not  gen- 


392  ECONOMICS 

erally  possessed  up  to  this  time;  but  the  rapid  introduc- 
tion of  substitutes  within  the  last  few  years,  among  all 
classes  of  consumers,  and  the  fact  that  many  of  these 
substitutes  exert  their  influence  upon  prices  in  the  field 
of  capital  goods,  where  the  people  are  trained  to  dis- 
cover and  appreciate  them,  assure  us  that  the  general 
limitation  of  the  power  of  monopoly  by  the  power  of 
substitution  will  not  be  long  delayed. 

320.  Social  welfare  may  occasionally  compel  govern- 
ment  regulation  of  prices. — There  remains  but  one 
phase  of  the  general  monopoly  problem  to  be  discussed. 
Though  one  may  believe  that  monopoly  is  a  universal 
phenomenon  and  that  it  is  so  big  a  problem  that  no 
political  party  or  government  could  logically  carry  out 
a  program  of  establishing  "cost"  prices  on  all  hands, 
should  one  always  on  that  account  oppose  on  general 
principles  any  attempt  to  regulate  prices?  In  a  pre- 
vious illustration  in  which  a  decrease  in  car  fares  was 
shown  to  result  in  an  increase  in  suburban  rents,  though 
the  people  renting  houses  out  of  town  found  that  they 
had  no  more  in  their  pocketbook  at  the  end  of  the  month, 
under  one  system  or  the  other,  the  same  people  did  nev- 
ertheless gain  by  the  change.  Low  fares  induce  people 
to  build  their  homes  over  a  wider  area.  They  mean  less 
congestion.  This  is  a  social  gain.  Reduced  rates  for 
school  children  would  come  under  the  same  head.  A 
person  might  thus  conceivably  favor  a  law  making  pos- 
sible lower  fares  in  congested  districts  or  school  tickets 
for  children  without  advocating  the  introduction  of  a 
general  regime  of  "cost"  prices.  In  the  one  case  the 
connection  between  social  welfare  and  a  lower  rate  is 
obvious  to  all.  Public  opinion  in  such  a  case  may  be 
crystallized  so  as  to  demand  a  degree  of  price  regulation. 
It  is  done,  however,  not  as  a  part  of  a  general  campaign 


PROBLEM  OF  MONOPOLY  393 

against  all  monopoly  wherever  found,  but  as  a  measure 
whose  end  is  first  and  last,  social  welfare.  Its  object 
is  not  to  establish  "cost"  prices  but  merely  to  lower  a 
particular  rate  of  charges  because  of  the  obvious  benefits 
that  would  follow. 

The  general  uneasiness  excited  by  the  growth  of  the  trusts  dur- 
ing the  earlier  years  of  the  movement  has,  in  the  light  of  experi- 
ence, somewhat  abated.  It  is  now  recognized  that  the  trust  form 
of  organization  is  adapted  to  rather  a  limited  number  of  busi- 
nesses, and  that  only  in  a  few  cases  can  combination  actually  suc- 
ceed for  any  length  of  time  in  suppressing  competition.  At  the 
same  time,  the  reasons  for  the  success  of  those  trusts  which  have 
succeeded  are  coming  to  be  more  generally  understood  and  public 
opinion  is  being  educated  to  discriminate  between  the  legitimate 
and  illegitimate  practices  of  the  combinations.  The  future  of 
the  trusts  in  the  United  States  depends  very  largely  upon  the 
promptness  with  which  unfair  methods  of  competition  are  pre- 
vented. If  effective  measures  are  taken  to  prevent  rate  dis- 
criminations on  the  part  of  the  transportation  companies  and 
price  discriminations  and  unfair  contracts  with  retailers  on  the 
part  of  the  trusts  themselves,  it  is  believed  that  the  movement 
towards  combination  will  be  checked,  and  that  such  combinations 
as  continue  to  be  effected  will  have  back  of  them  reasons  not 
opposed  to  public  policy.  For  behind  the  trust  movement  are 
more  solid  and  creditable  motives  than  the  activity  of  unscrupu- 
lous promoters  and  the  monopoly  hunger  of  greedy  manufactur- 
ers. The  economies  of  combination  are  in  many  cases  both  real 
and  substantial  and  a  public  policy  that  opposes  all  forms  of 
combination  is  as  unenlightened  as  it  must  in  the  long  run  be 
futile. 

The  most  effective  weapon  wielded  by  the  public  for  dealing 
with  the  trusts,  as  with  other  actual  and  potential  monopolies, 
is  the  consumer's  power  to  substitute  other  goods  for  those  which 
the  trusts  enhance  in  price.  As  consumption  and  processes  of 
production  become  more  varied  in  their  range,  this  power  ac- 
quires wider  scope.     It  already  effectually  precludes  excessive 


r 


894  ECONOMICS 

profits  to  any  very  large  number  of  businesses  and  limits  the 
monopoly  problem  to  those  few  services  and  commodities  which 
remain  indispensable  to  civilized  existence,  such  as  transportation 
facilities,  coal,  iron,  petroleum,  salt,  sugar,  etc.  As  time  goes 
on,  invention  and  discovery  may  still  further  narrow  the  list 
of  such  articles  and  services,  but  probably  never  to  such  an  extent 
as  to  make  the  monopoly  problem  one  of  little  importance  to  the 
economist. — H.  R.  Seager,  "Economics:  Brief ei  Course,"  pp. 
420-4.22. 


CHAPTER  V 

SOCIALISM 

821.  Social  unrest. — As  great  as  our  resources  are  in 
this  country  and  as  great  as  our  prosperity  is,  few  will 
contend  that  we  have  in  America  as  high  a  civilization 
as  we  are  entitled  to.  There  exists  in  this  country  un- 
mistakable marks  of  a  vast  amount  of  social  unrest. 
And  this  social  unrest  will  probably  continue  to  exist 
just  as  long  as  every  large  city  must  face  its  poverty 
problem,  just  so  long  as  men  die  in  their  prime,  leaving 
wives  and  children  in  danger  of  want,  and  just  so  long 
as  accidents,  many  of  which  are  preventable,  make  an 
army  of  maimed  dependents.  Though  as  a  nation  we 
are  still  in  our  youth,  we  have  already  developed  the 
problems  of  child  labor,  over-work  and  congestion. 
Though  the  socialist  is  by  no  means  the  only  one  who 
protests  against  these  conditions  nor  the  only  one  who 
has  a  program  for  their  amelioration,  the  name  socialism 
has  become  so  much  of  a  household  word  as  to  merit 
more  than  passing  attention  in  this  connection. 

The  recent  growth  of  socialism  is  one  of  the  impor- 
tant phenomena  of  modern  times.  Although  the  so- 
cialist party  in  this  country  numbers  but  about  a  half 
milhon,  it  has  attracted  to  its  ranks  some  capable  men 
from  many  walks  of  life.  No  one  can  claim  to  be  well 
informed  on  the  subject  until  he  has  a  clear  perception 
of  the  sociahst's  viewpoint.  One  may  reserve  the  right 
of  agreeing  with  him  or  not,  as  he  in  his  individual  judg- 
ment sees  fit,  but  one  cannot  afford  to  be  ignorant  of  the 

395 


396  ECONOMICS 

program  that  he  offers.  To  many  the  word  "socialism" 
stands  in  the  same  category  as  "anarchy"  and  that,  in 
the  same  category  as  "bomb-throwing."  Such  confu- 
sion of  thought  is  the  mark  of  an  untrained  mind. 

322.  Exploitation. — The  objections  which  the  so- 
ciaHst  makes  to  the  present  order  of  things  seem  to 
group  themselves  under  five  headings.  First  and  fore- 
most, there  is  his  belief  in  the  universality  of  exploita- 
tion. Exploitation  consists  of  getting  less  in  return 
for  your  services  than  you  are  worth.  According  to  the 
socialist's  use  of  the  term,  a  day  laborer  creating  in  a 
year  $900  worth  of  value  and  receiving  only  $400  in 
wages  is  being  exploited  by  the  capitalist  to  the  amount 
of  $500.  In  the  eyes  of  the  socialist,  exploitation  is 
an  inevitable  result  of  a  system  permitting  the  private 
ownership  of  the  tools  of  production,  and  the  purchase 
of  labor  in  the  same  manner  as  any  commodity.  The 
owner  of  the  machine  becomes  the  master,  and  the 
worker  must  accept  his  pay  or  starve.  Since  it  is  to 
the  interest  of  the  tool  owner  to  get  workers  at  the  lowest 
figure  possible,  exploitation  results. 

The  second  criticism  that  the  socialist  urges  against 
tfie  present  system  is  that  it  permits  the  growth  of 
monopolies  and  offers  no  effective  way  to  check  them. 
Many  of  the  fabulous  fortunes  of  to-day  have  been  made 
through  the  monopoly  control  of  articles  of  general  con- 
sumption— coal,  meat,  ice  and  iron;  or  through  the 
ownership  of  monopoly  business — street-car  lines,  tele- 
phones, railroads,  gas  and  water  supply.  The  socialist 
maintains  that  there  is  no  escape  to-day  from  the  mo- 
nopolist's grip  except  by  state  ownership  and  operation 
of  industry.  He  believes  that  it  is  hopeless,  and  further- 
more, undesirable,  to  endeavor  to  restore  competition 
as  a  regulator  of  prices.     As  competition  largely  gave 


SOCIALISM  397 

way  to  combination,  so  he  believes  state  monopolies  must 
succeed  private  monopolies. 

323.  No  remedy  furnished  by  individualism. — The 
third  criticism  offered  by  the  socialist  is  that  society 
lacks  a  plan  for  the  constructive  development  of  all  of 
its  parts.  He  sees  chaos  in  the  present  arrangement. 
The  world  is  a  bundle  of  contradictions  to  him.  In 
an  age  of  plenty,  he  still  sees  the  universal  specters  of 
poverty,  ignorance  and  crime.  Although  man  has  con- 
quered his  environment,  through  harnessing  the  forces 
of  nature  and  discovering  her  deepest  secrets  in  the 
plant,  animal,  and  mineral  worlds,  there  still  await  solu- 
tion the  problem  of  the  underfed  child,  the  homeless 
man,  imperfect  sanitation,  low  pay,  and  lack  of  em- 
ployment. Progress  is  a  reality  to  him,  but  so  is 
poverty.  Wherever  he  looks  he  sees  good  and  bad. 
Whichever  it  happens  to-be,  seems  to  him  to  be  but  the 
result  of  blind  chance.  Too  often  the  welfare  and  hap- 
piness of  many  are  dependent  solely  on  the  accident 
of  birth.  The  race  of  life  is  unequal.  Some  start  with 
such  handicaps  as  a  body  under-nourished  from  infancy, 
and  a  mind  undeveloped,  having  nothing  beyond  the 
merest  rudiments  of  an  education.  These  are  predes- 
tined to  a  life  in  a  factory  from  the  age  of  thirteen  or 
fourteen,  while  others  have  the  possibility  of  a  college 
diploma,  and  social  and  business  position  awaiting  them. 

324.  Wastefulness  of  individualism. — The  fourth 
criticism  that  the  socialist  urges  against  modern  society 
is  its  wastefulness.  Competition  is  uneconomic;  coop- 
eration, economic.  Under  the  competitive  system  much 
is  done  in  duplicate  and  triplicate  that  could  just  as 
well  be  done  once  under  a  system  of  cooperation. 
This  is  particularly  true  in  the  distribution  of  goods 
for  consumption.     A  half  dozen  competing  hucksters, 


398  ECONOMICS 

milkmen,  and  icemen,  pass  over  the  same  route  daily 
when  half  the  number  might  have  distributed  the  same 
amount  of  goods  had  there  been  no  competition.  In 
the  question  of  milk,  meat  and  Hke  supplies,  we  can 
no  longer  trust  to  the  private  business  conscience  to 
give  us  goods  free  from  disease  and  of  unadulterated 
quality.  The  government  now  takes  the  indirect  method 
of  employing  a  large  corps  of  inspectors  merely  to  go 
over  the  work  of  private  competitors,  when  it  might  do 
the  work  itself. 

325.  Competition  essentially  evil. — A  fifth  criticism 
of  the  socialist  is  against  the  essentially  evil  nature  of 
competition.  In  industrial  competition  he  sees  a  force 
that  calls  out  all  the  bad  in  human  nature,  while  at  the 
same  time  suppressing  much  that  is  good.  To  beat 
their  competitors  and  make  a  profit  men  adulterate 
food,  employ  child  labor,  violate  factory  inspection  laws, 
and  pay  low  wages.  Competition  puts  the  law-abiding 
and  humane  employer  at  a  disadvantage  and  forces  the 
indifferent  employer  over  into  the  camp  of  those  who  seek 
success  at  any  price.  The  socialist  points  out  the  fact 
that  many  a  child-labor  battle  has  been  lost  in  a  northern 
state  because  the  cry  was  raised  by  even  the  most  public- 
spirited  employers  that  their  business  would  be  ruined 
if  they  had  to  compete  with  the  low  restriction  put  upon 
child  labor  in  certain  of  the  cotton  manufacturing  states 
of  the  South. 

326.  The  socialistic  program. — And  so  the  socialist, 
weighing  the  present  organization  of  society  in  the  bal- 
ance and  finding  it  wanting,  comes  forward  with  a  plan 
built  on  an  entirely  different  basis.  He  proposes  to 
substitute  for  the  private  ownership  of  all  land  and  capi- 
tal goods,  i.  e.,  factories,  railroads,  stores,  and  the  like, 
government  ownership  and  operation.     Because  under 


SOCIALISM  399 

such  a  system  there  would  then  be  no  capitalist  to  de- 
mand interest,  all  the  returns  of  labor  would  go  to  labor, 
and  exploitation  would  cease.  As  the  government 
would  own  all  the  land  and  natural  resources,  there 
would  be  no  monopohst's  profits  to  be  paid  out  of  the 
pockets  of  consumers.  Because  competition  would  be 
destroyed,  there  would  be  no  further  incentive  to 
adulterate  goods,  to  employ  child  labor,  or  for  the  viola- 
tion of  health  and  fire  ordinances.  In  place  of  a  society 
of  competing  units,  each  struggling  to  get  the  most 
for  himself,  the  state  under  socialism,  would  substitute 
sn  orderly  plan.  Every  child  would  be  guaranteed 
education  and  support  at  state  expense,  and  every  man 
in  old  age  after  his  life  work  is  over,  would  be  an  honored 
pensioner  of  the  government.  Instead  of  working  ten 
and  eleven  hours  a  day,  the  day  would  be  cut  in  half, 
through  the  economics  of  cooperative  action  and  the 
absence  of  social  parasites. 

Under  socialism  every  one  would  be  a  government 
employe.  Instead  of  working  for  this  corporation,  or 
that  entrepreneur,  a  man  would  work  for  the  govern- 
ment, much  as  policemen,  letter  carriers,  and  firemen 
now  do.  The  workman  would  draw  his  pay  from  the 
state  as  he  draws  it  from  this  or  that  corporation  and 
spend  it  as  he  saw  fit,  except  that  he  could  neither 
speculate  in  land  nor  stocks,  as  they  would  not  be  for 
sale. 

The  socialist  believes  that  in  many  ways  society  has 
outgrown  the  institution  of  private  property,  just  as 
much  as  it  has  outgrown  the  institution  of  property  in 
individuals  known  as  slavery.  He  admits  that  both  may 
have  been  valuable  at  a  certain  stage  in  the  development 
of  civilization,  but  that  that  time  is  now  passed.  It 
should  be  borne  in  mind  that  the  socialist,  in  attacking 


400  ECONOMICS 

the  institution  of  private  property,  only  opposes  pri- 
vate ownership  of  land,  natural  resources,  and  tools  of 
production.  Over  the  ownership  of  consumption  goods, 
as  houses,  clothes,  food  and  the  like,  socialism,  unlike 
communism,  would  exercise  no  control. 

327.  Socialism  and  the  single  tax. — The  socialist,  in 
common  with  the  single  taxer,  believes  that  the  land 
is  a  gift  to  all  from  the  Creator  as  much  as  air  or  water. 
He  would,  therefore,  restore  it  to  its  original  state. 
He  feels,  however,  that  the  single  taxer  stops  short  in 
his  reform  in  confining  common  ownership  to  only  two 
means  of  life,  farming  and  mining.  He  believes  that 
the  tools  of  production  are  equally,  if  not  more  so,  means 
of  life  than  land.  Therefore,  he  contends  they  should 
be  held  in  common  as  much  as  land  and  the  natural 
resources.  He  maintains  that  social  expediency,  if  not 
social  justice  requires  as  much.  Arguing  solely  from 
the  standpoint  of  expediency,  he  contends  that  if  the  best 
interests  of  society  are  served  by  a  system  of  common 
ownership  of  its  capital  goods,  then  there  is  no  reason 
why  such  a  system  should  not  be  put  into  operation. 
Pubhc  opinion  needs  only  a  little  further  development. 
As  it  is  now,  there  is  hardly  such  a  thing  as  absolute 
ownership.  One  may  own  but  he  may  not  or  shall  not 
abuse  his  horse.  Even  now  society  has  an  interest  in 
private  property,  and  the  will  of  the  individual  must 
bow  to  it. 

328.  How  is  socialism  to  he  instituted? — We  are  here 
naturally  led  to  ask.  How  can  this  change  be  wrought 
and  all  industry  nationalized?  This  would  require  the 
acquisition  by  the  government  of  not  only  all  land  and 
resources,  but  also  of  all  railroads  and  industrial  plants. 
Could  this  be  accomplished  with  public  opinion  in  its 
present  condition?     Such  socialists  as  Mr.  H.  G.  Wells 


SOCIALISM  401 

would  answer  "No."  He  writes:  "Socialist  institu- 
tions, as  I  understand  them,  are  only  possible  in  a 
civilized  state,  in  a  state  in  which  the  whole  population 
can  read,  discuss,  participate,  and  in  a  considerable 
measure,  understand.  Education  must  precede  the 
sociaHst  state."  And  again:  "I  have  tried  to  let  it 
become  apparent  that  while  I  do  firmly  believe,  not  only 
in  the  splendor  and  nobility  of  the  socialist  dream,  but 
in  its  ultimate  practicability,  I  do  also  recognize  quite 
clearly  that  with  people  just  as  they  are  now,  with  their 
prejudice,  their  ignorance,  their  misapprehension,  their 
unchecked  vanities  and  greeds  and  jealousies,  their  un- 
tutored and  misguided  instincts,  their  irrational  tradi- 
tions, no  socialist  state  can  exist,  no  better  state  can  exist 
than  the  one  we  have  now  with  all  its  squalor  and 
cruelty.  Every  change  in  human  institutions  must 
happen  concurrently  with  a  change  in  ideas.  Upon  this 
plastic,  uncertain,  teachable  thing,  human  nature,  within 
us  and  without,  we  have,  if  we  really  contemplate 
socialism  as  our  achievement,  to  impose  guiding  ideas 
and  guiding  habits,  we  have  to  coordinate  all  the  good 
will  that  is  active  or  latent  in  our  world  in  one  con- 
structive plan." 

Until  this  intellectual  revolution  is  accomplished,  what 
is  the  course  open  to  the  socialist  by  which  he  may 
ultimately  reach  his  goal  of  the  complete  socializing  of 
industry?  The  answer  is  found  in  the  following  quota- 
tions from  a  Fabian  socialist: 

The  peaceful  and  systematic  taking  over  from  private  en- 
terprise, by  purchase  or  otherwise,  either  by  national  or  by  the 
municipal  authorities,  as  may  be  most  convenient,  of  the  great 
common  servces  of  land  control,  mining,  transit,  food  supply, 
the  drink  trade,  lighting,  force  supply,  and  the  like.  The 
systematic  raising  of  the  minimum  standard  of  life  by  factory 
1—26 


402  ECONOMICS 

and  labor  legislation,  and  particularly  by  the  establishment  of 
a  minimum  wage.  These,  along  with  the  measures  providing  a 
longer  school  age,  public  baths,  parks,  and  playgrounds,  are 
some  of  the  immediate  lines  of  action  open  to  the  socialist. 

Mr.  Morris  Hillquit,  one  of  the  acutest  thinkers 
among  American  socialists,  thus  describes  the  transi- 
tional stage: 

Modern  socialists  recognize  that  social  institutions  are  not  the 
results  of  arbitrary  choice,  but  of  historical  growth.  When  the 
ever  working  forces  of  industrial  evolution  have  created  new 
economic  interests  and  social  relations,  the  political  forms  of 
society  must  be  modified  to  meet  these  changes,  and  when  these 
new  interests  and  relations  become  incompatible  with  the  very 
basis  of  the  existing  social  system,  that  system  is  bound  to  give 
way  to  a  more  adequate  order.  The  socialists  contend  that  the 
present  system  of  individual  ownership  in  the  larger  and  social 
means  of  production,  and  the  system  of  industrial  competition 
based  on  such  individual  ownership,  have  become  or  are  fast 
becoming  incompatible  with  the  interests  of  an  ever  growing 
majority  of  the  population  and  with  the  progress  of  industry 
itself.  They  perceive  a  tendency  in  the  modern  industrial  de- 
velopment towards  the  collective  ownership  of  these  means  of 
production  and  the  socialization  of  industries  ;  they  see  the  public 
necessity  of  such  transformation,  and  advocate  and  demand  its 
accomplishment. 

That  is  the  whole  of  the  socialist  program,  and  it  is  cer- 
tainly wide  enough.  The  transformation  of  the  means  of  pro- 
duction from  private  to  public  ownership  is  by  no  means  a 
simple  task.  It  is  not  reasonable  to  suppose  that  the  possess- 
ing classes,  the  owners  of  the  land,  the  mines,  railroads  and 
factories,  the  financiers  and  capitalists  of  all  descriptions,  will 
some  fine  day  voluntarily  surrender  all  their  privileges  and  pos- 
sessions to  the  people,  nor  is  it  likely  that  the  transformation 
will  be  accomplished  by  one  single  and  simple  decree  of  the  vic- 
torious proletariat  all  over  the  civilized  world.     More  likely  the 


SOCIALISM  403 

process  of  transformation  will  be  complicated  and  diversified, 
and  will  be  marked  by  a  series  of  economic  and  social  reforms 
and  legislative  measures  tending  to  divest  the  ruling  classes  of 
their  monopolies,  privileges  and  advantages,  step  by  step,  until 
they  are  practically  shorn  of  the  power  to  exploit  their  fel- 
low-men; i.  e.,  until  all  the  important  means  of  production 
have  passed  into  collective  ownership  and  all  the  principal  in- 
dustries are  reorganized  on  the  basis  of  socialist  cooperation. 
The  proposed  measures  that  are  expected  to  effect  this  eventual 
transformation  constitute  the  "immediate"  or  "transitional"  de- 
mands of  socialism,  and  are  part  of  the  general  socialist  pro- 
gram, each  socialist  party  emphasizing  those  points  which  are 
of  more  immediate  importance  in  view  of  the  social  and  political 
conditions  of  its  own  country  at  any  given  time.  The  measures 
thus  most  generally  advocated  by  the  socialists  are:  universal 
suffrage  and  equal  political  rights  for  men  and  women;  the 
initiative,  referendum,  proportional  representation  in  legisla- 
tive bodies,  the  right  to  recall  representatives  by  their  constit- 
uents ;  greater  autonomy  for  the  municipalities  and  limitation 
of  the  powers  and  functions  of  the  central  government;  the 
abolition  of  standing  armies ;  progressive  reduction  of  the  hours 
of  labor  and  increase  of  wages ;  state  employment  of  the  un- 
employed ;  state  insurance  of  workingmen  in  case  of  accidents 
and  sickness ;  old  age  pensions  for  workingmen ;  state  provisions 
for  all  orphans  and  invalids ;  abolition  of  all  indirect  taxes ;  a 
progressive  tax  on  property,  income  and  inheritance;  municipal 
ownership  of  all  municipal  utilities ;  state  or  national  ownership 
of  all  mines,  means  of  transportation  and  communication,  and 
of  all  industries  controlled  by  monopolies,  trusts  and  com- 
bines, and  the  gradual  assumption  by  the  municipality  or  state 
of  all  other  industries  as  soon  as  they  reach  a  state  where  they 
become  susceptible  of  socialization. — Morris  Hillquit,  "Socialism 
in  Theory  and  Practice,"  Chapter  V,  pp.  100-102. 

329.  Reconciliation  between  socialism  and  individual- 
ism.— What  the  ultimate  outcome  of  socialism  will  be 
it  would  indeed  be  difficult  to  state.     Judging  from  the 


404j  economics 

recent  trend  of  thought,  it  might  be  safe  to  predict 
that  pubhc  opinion  will  ultimately  come  to  be  much 
more  unified  on  many  of  the  economic  questions  involved 
in  socialism.  There  already  seems  to  be  a  conciliation 
going  on  between  those  who  have  hitherto  been  in  op- 
posing schools  of  thought.  The  socialist  of  to-day  seems 
to  be  more  individualistic  than  his  predecessor,  while 
the  old-time  believer  in  laissez  faire  has  practically  disap- 
peared, and  his  successor,  the  man  who  still  styles  himself 
an  individualist,  has  become  more  and  more  a  socialist. 
The  force  of  this  statement  can  be  felt  by  comparing  on 
one  hand  the  works  of  such  socialists  as  Marx  and  Engels 
with  those  of  H.  G.  Wells  of  England,  and  John  Spargo 
of  America,  and  on  the  other  hand,  the  works  of  such 
an  individual  as  Herbert  Spencer  with  those  of 
Professor  Clark  or  men  of  the  type  of  Ex-President 
Roosevelt.  This  change  in  a  measure  is  the  result  of 
the  growth  of  social  consciousness  which  to-day  seems 
to  permeate  the  atmosphere  of  modern  life.  Certainly 
the  political  and  social  sciences  are  receiving  increasing 
attention  from  both  practical  and  academic  stand- 
points. The  failure  of  many  communistic  schemes 
seems  to  have  impressed  on  the  minds  of  reformers  that 
in  the  past  they  often  misread  human  psychology  by 
allowing  no  room  for  the  expression  of  individuality. 

From  a  theory  of  laissez  faire  we  have  so  enlarged  the 
functions  of  government  that  to-day  they  not  only  in- 
clude factory  and  food  inspection,  child  labor  and  com- 
pulsory education  laws,  but  in  some  places  public 
ownership  and  operation  of  the  public  utilities  of  light, 
water,  and  street  railways.  Many  thoughtful  students 
of  modern  problems — men  who  do  not  belong  to  the 
ranks  of  the  socialists — feel  that  the  time  is  not  far 


SOCIALISM  406 

distant  when  we  shall  be  compelled  to  make  a  change 
in  our  present  form  of  inheritance  law,  whereby  vast 
fortunes  are  passed  on  from  one  generation  to  another. 
Some  also  feel  that  as  a  result  of  the  present  interest 
in  child  labor,  women  in  industry,  and  the  sweating  evil, 
we  shall  ultimately  fix  not  only  the  number  of  hours  for 
work  but  also  the  rate  of  pay  for  women  and  children.. 

330.  Socialists  making  concessions  to  individualism. — 
These  changes  would  seem  to  indicate  a  conciliation 
that  is  rapidly  being  effected.  This  conciliation  is  not 
one-sided.  The  following  from  the  pen  of  John  Spargo 
indicates  how  socialism  has  abandoned  some  of  its  older 
traditions  of  substituting  at  every  point  state  action 
for  that  of  the  individual. 

The  new  society  must  include  at  least  the  following:  (1) 
ownership  of  all  natural  resources,  such  as  land,  mines,  forest, 
oil  wells,  and  so  on;  (2)  operation  of  all  the  means  of  transpor- 
tation and  communication,  other  than  those  of  purely  personal 
services;  (3)  operation  of  all  industrial  production  involving 
large  capital  and  associated  labor,  except  where  carried  on  by 
voluntary,  democratic  cooperation;  (4)  organization  of  all 
labor  essential  to  the  public  service,  such  as  the  building  of 
schools,  hospitals,  docks,  roads,  bridges,  sewers,  and  the  like; 
the  construction  of  all  the  machinery  and  plants  requisite  to  the 
social  production  and  distribution,  and  of  all  things  necessary 
for  the  maintenance  of  those  engaged  in  such  public  services  as 
the  national  defense  and  all  who  are  wards  of  the  state;  (5)  a 
monopoly  of  the  monetary  and  credit  functions,  including  coin- 
age, mortgaging,  and  the  extension  of  credit  to  private  enter- 
prise. With  these  economic  activities  undertaken  by  the  state, 
a  pure  democracy  differing  vitally  from  all  the  class-dominated 
states  of  history,  private  enterprise  would  by  no  means  be  ex- 
cluded, but  limited  to  an  extent  making  the  exploitation  of  public 
interests  and  needs  for  private  gain  impossible.     Socialism  thus 


406  ECONOMICS 

becomes    the    defender    of    individual    liberty,    not    its    enemy. 
.     The  future  is  not  a  life  completely  enmeshed  in  a  net- 
work of  government,  but  a  life  with  a  minimum  of  restraint. 

It  is  interesting  to  note  in  the  above  that  the  author 
only  includes  under  government  ownership  and  opera- 
tion all  industrial  production,  production  involving  large 
capital  and  associated  labor,  except  where  carried  on  by 
voluntary,  democratic  cooperation.  The  possibility 
of  the  social  "individualist,"  and  the  individualistic 
socialist  some  day  standing  on  one  and  the  same  plat- 
form does  not  seem  far  removed  when  one  notes  the 
changes  of  thought  that  have  occurred  in  the  past 
century. 

331.  H.  G.  Wells  on  socialism  as  social  democracy. — ■ 
The  following,  from  "New  Worlds  for  Old,"  by  H. 
G.  Wells,  shows  to  how  large  a  degree  the  modern 
socialist  is  trying  to  remove  the  name  Utopian  from  his 
cause — a  charge  which  has  kept  from  his  ranks  a  large 
number  of  men  of  practical  affairs. 

I  myself  am  the  profoundest  believer  in  democracy,  in  a 
democracy  awake  intellectually,  conscious  and  self-disciplined; 
but  so  long  as  this  mystic  faith  in  the  crowd,  this  vague,  emo- 
tional, uncritical  way  of  evading  the  immense  difficulties  of 
organizing  just  government  and  a  collective  will  prevails,  so 
long  must  the  socialist  project  remain  not  simply  an  impracti- 
cable, but  in  an  illiterate,  badly  organized  community,  even  a 
dangerous  suggestion.  I,  as  a  socialist,  am  not  blind  to  these 
possibilities,  and  it  is  foolish  because  a  man  is  in  many  ways  on 
one's  side  that  one  should  not  call  attention  to  his  careless 
handling  of  a  loaded  gun.  Social  democracy  may  conceivably 
become  a  force  that  in  the  sheer  power  of  untutored  faith  may 
destroy  government  and  not  replace  it. 

Perhaps  the  future  of  the  whole  socialist  movement 


SOCIALISM  407 

cannot  be  better  stated  then  by  again  quoting  from  H. 
G.  WeUs: 

The  modern  socialist  considers  that  this  generalization  (i.  e., 
of  an  inevitable  class  war,  of  a  revolution  followed  by  a  mil- 
lennium) is  a  little  too  confident  and  comprehensive;  he  perceives 
that  a  change  in  custom,  law,  or  public  opinion  may  delay,  ar- 
rest or  invert  the  economic  process ;  that  socialism  may  arrive 
after  all  not  by  a  social  convulsion  but  by  the  gradual  and  de- 
tailed concession  of  its  propositions.  The  Marxist  presents 
dramatically  what  after  all  may  come,  methodically  and  unro- 
mantically,  a  revolution  as  orderly  and  quiet  as  the  precession 
of  the  equinoxes.  There  may  be  a  concentration  of  capital  and 
a  relative  impoverishment  of  the  general  working  mass  of  peo- 
ple, for  example,  and  yet  a  general  advance  in  the  world's  pros- 
perity and  a  growing  sense  of  social  duty  in  the  owners  of 
capital  and  land  may  do  much  to  mask  this  antagonism  of  class 
interests  and  ameliorate  its  miseries.  Moreover,  this  antagonism 
itself  may,  in  the  end,  find  adequate  discussion  and  the  class  war 
come  disguised  beyond  recognition  with  hates  mitigated  by 
charity,  swords  beaten  into  pens,  a  mere  constructive  conference 
between  two  classes  of  fairly  well-intentioned,  albeit  perhaps  still 
biased,  men  and  women. 

The  above  quotations  indicate  the  weakness  of  social- 
ism as  an  immediate  and  practical  line  of  action.  The 
acquisition  of  all  tools  of  production  by  the  government 
would  involve  the  confiscation  of  a  large  amount  of 
property  or  the  taxation  of  the  people  in  order  to  buy 
out  the  existing  owners.  As  desirable  as  the  government 
ownership  of  these  tools  of  production  might  be  from 
the  theory  viewpoint,  it  could  hardly  be  accomplished 
with  human  nature  and  public  opinion  in  anything 
like  its  present  stage  of  development.  It  may  be, 
furthermore,  legitimately  questioned  whether  the 
agencies  of  the  national  government,  the  state  or  the 


408  ECONOMICS 

municipality  are  to  be  trusted  to  conduct  business  with 
the  same  efficiency  and  economy  as  it  is  conducted  under 
the  present  system  of  private  ownership.  Whatever 
may  be  the  abuses  of  the  present  system,  it  must  be  ad- 
mitted after  all  that  the  vast  majority  of  men  in  the 
United  States  are  living  on  a  higher  standard  of  living 
•  than  at  any  other  stage  in  the  world's  history  and  while 
this  fact  does  not  excuse  the  present  evils  which  exist, 
nor  is  a  cause  for  accepting  present  conditions  as  all  that 
is  to  be  desired,  it  does  furnish  a  good  reason  for  con- 
sidering well  before  overthrowing  our  present  system 
of  production  in  its  entirety. 

Socialism  is  not  new,  but  is  a  very  old  theory  that  has  reap- 
peared constantly  In  one  form  or  another,  at  least  since  the  tim^ 
of  Plato.  It  has  been  advanced  often  when  a  sharp  separation 
between  the  classes  of  rich  and  poor  has  brought  the  problem 
of  poverty  to  the  front.  Ideals  of  political  or  social  equality 
have  been  another  cause  of  socialistic  theories.  Plato's  "Repub- 
lic," with  its  proposals  for  the  extremest  subordination  of  indi- 
vidual life  to  the  direction  of  the  State,  has  for  its  background 
a  sharp  separation  of  classes,  and  a  bitter  conflict  between  rich 
and  poor,  that  occurred  not  only  in  Athens  but  in  most  of  the 
Grecian  cities.  In  the  sixteenth  and  seventeenth  centuries,  the 
social  distress  caused  by  widespread  economic  and  political 
changes  led  to  such  works  as  Sir  Thomas  More's  "Utopia"  and 
Campanella's  "City  of  the  Sun."  Again,  in  the  eighteenth  cen- 
tury, the  misery  existing  in  France  before  the  Revolution  fur- 
nished a  fruitful  field  for  socialistic  speculations.  Finally,  since 
the  Industrial  Revolution,  the  increased  importance  of  capital 
has  caused  a  sharper  separation  of  capitalists  and  laborers,  and 
has  furnished  the  ground  for  the  growth  of  modern  socialism. 
This  movement  has  been  strengthened  by  the  growth  of  demo- 
cratic political  ideals.^ 

1  The  student  would  find  it  interesting  to  read  Plato's  "Republic";  see 
Jowett's  "  Dialogues  of  Plato,"  III.     There  is  hardly  a  better  criticism  of 


SOCIALISM  409 

Socialists  criticise  severely  our  present  methods  of  produc- 
ing wealth,  and  hold  that  production  could  be  much  more  ef- 
ficiently managed  under  socialism.  They  urge  that  competitive 
methods  are  "planless."  Producers  now  work  at  cross  purposes ; 
mistakes  are  common;  and  our  industry  is  far  less  productive 
than  it  would  be  if  managed  on  the  largest  possible  scale,  in  ac- 
cordance with  comprehensive  general  plans.  Secondly,  our 
present  competitive  methods  cause  a  great  deal  of  waste.  Not 
only  have  we  much  unnecessary  reduplication  of  plants,  but  also 
needless  expenses  for  advertising,  traveling  salesmen,  and  similar 
purposes.  Thirdly,  producers  have  a  strong  inducement  at 
present  to  increase  the  value  of  their  commodities  by  restricting 
the  output,  as  is  done  by  the  anthracite  coal  monopoly.  Soci- 
ety is  poorer  on  account  of  the  artificial  scarcity  created  in  this 
way.  Again,  socialists  show  that  there  is  great  waste  in  our 
methods  of  exchanging  products.  Many  more  people  are  en- 
gaged in  wholesale  and  retail  trade,  especially  in  the  latter,  than 
are  really  needed. 

We  must  admit  that  there  is  a  great  deal  of  truth  in  all  of 
these  criticisms.  But  such  an  admission  does  not  necessarily 
lead  to  the  acceptance  of  socialism.  For  the  weakness  of  social- 
ism is  even  greater  than  that  of  the  present  system. 

1.  First  of  all,  will  socialism  lead  men  to  exert  themselves 
as  actively  as  they  do  at  present  under  the  desire  for  pecuniary 
gain.''  Socialists  urge  that  the  desire  for  social  esteem  is  a 
powerful  motive  at  present,  and  would  prove  still  more  so  under 
their  system.  But  while  many  people  are  influenced  by  the  de- 
sire for  social  esteem,  others,  apparently,  are  not  deeply  affected 
by  this  motive.  Moreover,  social  esteem  of  one  kind  or  another 
can  be  gained  at  present  by  many  actions  that  do  not  conduce 

socialism  than  that  passed  by  Aristotle  upon  Plato's  schemes;  see  Abis- 
totle's  "Politics,"  Bk.  II.,  Chaps.  3  and  5.  Plato's  "Republic"  has  been 
called  "the  fruitful  parent  of  modern  Utopias";  and,  after  studying  it, 
the  student  might  read  the  socialistic  romances  contained  in  Mohlev's  "  Ideal 
Commonwealths,"  especially  Mohe's  "  Utopia "  and  Campanella's  "  City 
of  the  Sun."  Then  Mr.  Bellamy's  "  Looking  Backward,"  the  best  known 
of  the  romances  representing  modern  socialism,  might  be  read  in  connection 
with  these  earlier  writers. 


410  ECONOMICS 

to  the  real  welfare  of  society;  and  it  is  not  clear  that,  under 
socialism,  public  opinion  would  so  change  that  men  could  not 
gain  notoriety  in  ways  that  would  be  thoroughly  harmful.  Also 
socialists  claim  that  altruistic  motives  may  be  expected  to  have 
greater  force  under  a  socialistic  regime.  But  we  have  no  ex- 
perience that  justifies  us  in  assuming  that  the  majority  of  men 
will,  in  any  immediate  future,  exert  themselves  as  actively  under 
the  influence  of  such  motives  as  they  do  at  present  under  the 
stimulus  of  self-interest.  Of  course,  the  socialistic  state  might 
compel  men  to  work.  But  would  such  labor  be  more  effective 
than  that  of  slaves  or  convicts.? 

2.  The  difficulties  of  organizing  and  managing  all  industries 
on  a  national  scale  are  enormous.  These  difficulties  would  be 
especially  great  in  industries  like  agriculture  that  do  not  lend 
themselves  readily  to  large-scale  production.  Moreover,  gov- 
ernmental management  presents  serious  problems,  chiefly  the 
difficulty  of  securing  as  honest  and  efficient  administration  as  can 
be  secured  by  private  enterprise,  at  its  best.  Doubtless  our 
methods  of  public  administration  can  be  improved,  and  would 
be  further  improved  before  the  government  should  assume  the 
control  of  industry.  But  we  have  no  reason  to  believe  that  the 
government  could  avoid  errors,  or  that,  on  the  whole,  it  could 
carry  on  manufactures  and  agriculture  more  successfully  than 
they  are  conducted  at  present. 

3.  Another  difficulty  that  socialism  would  encounter  would 
be  the  determination  of  methods  for  distributing  the  labor  force 
among  the  various  employments.  Some  are  much  more  pleas- 
ant or  are  esteemed  more  highly  than  others.  Will  it  be  possible 
for  the  government  to  apportion  the  more  important  or  more 
desirable  positions  in  such  a  way  as  to  cause  less  dissatisfaction 
than  at  present.''  A  very  important  question  arises  here.  By 
eliminating  incompetent  persons  from  the  field  of  competition 
we  manage  fairly  well  at  present  to  secure  able  management  of 
industries;  and  we  offer  the  prospect  of  exceptional  profits  as 
a  reward  for  special  efficiency.  Will  the  mass  of  people  living 
under  a  socialistic  government  consent,  by  their  votes  or  other- 
wise, to  adequate  methods  of  securing  able  business  manage- 


SOCIALISM  411 

ment?  Taking  men  as  we  find  them  at  present,  this  may  well 
be  doubted. — C.  J.  Bullock,  "Introduction  to  the  Study  of 
Economics,"  pp.  504-508. 

THE    socialist's     ECONOMIC     ERBOS. 

It  is  a  fundamental  error  in  analysis  to  ascribe  the  value  of 
the  products  of  industry  to  the  labor  involved  in  their  produc- 
tion. Value,  as  already  explained,  is  the  joint  result  of  utility 
and  limitation  of  the  supply.  Under  conditions  of  free  com- 
petition value  arises  because  of  the  cost  involved  in  producing 
goods.  This  varies  under  different  natural  conditions  and  con- 
sequently rent  appears.  Under  the  least  favorable  natural  con- 
ditions resorted  to  cost  includes  not  only  labor,  but  also  the 
sacrifice  involved  in  supplying  the  capital  indispensable  to 
efficient  production.  The  value  of  the  product  must  be  great 
enough  to  remunerate  workmen  and  capitalists,  or  the  induce- 
ment which  causes  those  at  the  margin  of  doubt  between  saving 
and  spending  to  save  will  be  removed  and  the  fund  of  capital 
will  be  reduced.  The  payment  of  interest  is  as  just  and,  eco- 
nomically, as  necessary  as  the  payment  of  wages.  It  is  the 
premium  industrial  society  offers  to  those  who  will  furnish  it 
with  the  capital  it  needs  and  it  is  never  higher  than  is  necessary 
to  secure  this  capital.  It  is  true  that  much  of  the  needed,  capital 
would  be  furnished  if  there  were  no  premium,  but  it  is  equally 
true  that  many  workmen,  and  especially  those  whose  work  is  of 
most  value  to  society,  would  work  for  nothing  rather  than  aban- 
don their  chosen  professions.  In  each  case  the  reward  is  deter- 
mined by  the  character  and  motives  of  the  marginal  men  in  the 
group  affected.  In  each  case,  moreover,  the  necessity  of  reward- 
ing these  marginal  men  gives  a  value  to  the  product  sufficient 
to  reward  at  the  same  rate  all  men  in  the  group.  The  interest 
capitalists  receive  is  in  no  sense  subtracted  from  the  reward  that 
goes  to  labor.  It  comes  from  the  extra  product  due  to  the 
assistance  which  capital  goods  render  to  production,  just  as  the 
wages  of  labor  come  virtually  from  the  products  of  labor.  In 
neither  case  is  there  any  exploitation  of  one  factor  by  the  other. 


412  ECONOMICS 

If  this  analysis  is  accurate  the  whole  contention  of  Marx  and  his 
followers  falls  to  the  ground,  and  the  present  industrial  system 
is  cleared  at  least  of  the  charge  of  being  based  on  the  legalized 
robbery  of  the  laboring  by  the  propertied  class. 

Although  based  on  an  incorrect  analysis  of  economic  relations 
in  its  revolutionary  form  and  looking  forward  to  a  future  so 
remote  as  to  have  little  direct  bearing  on  present-day  problems 
in  its  evolutionary  form,  socialism  is  much  more  than  a  mere 
''philosophy  of  the  unsuccessful"  or  "vision  of  deluded  dream- 
ers." As  an  ideal  it  appeals  strongly  to  many  men  and  women 
who  are  neither  unsuccessful  nor  dreamers  and  it  supplies  them 
with  an  excellent  standard  by  which  to  criticise  the  undoubted 
evils  in  the  present  economic  situation.  Such  criticism  is  both 
helpful  and  harmful.  So  far  as  it  serves  to  concentrate  at- 
tention upon  definite  evils  and  to  foster  the  belief  that  they  are 
remediable,  it  is  a  valuable  aid  to  constructive  social  reform. 
So  far,  however,  as  it  tends  to  intensify  class  antagonisms  and 
to  teach  wage-earners  that  they  are  the  victims  of  legalized 
exploitation  and  that  they  must  organize  to  despoil  by  force 
the  owners  of  property  who  oppress  them,  it  is  a  bar  to  true 
progress. — H.  R.  Seager,  "Economics:  Briefer  Course,"  pp. 
448-9. 


CHAPTER  VI 

LABOR  PROBLEM 

332.  Nature  of  the  problem. — The  labor  problem  is 
the  result  of  two  conflicting  viewpoints  as  to  the  true 
status  of  labor  in  our  industrial  system.  The  capitalist 
says:  "Labor  is  a  commodity  which  I  have  a  right  to 
purchase  in  the  open  market  at  as  low  a  figure  as  I  can." 

The  laborer  says:  "I  am  a  copartner  with  capital  in 
industry  and  as  a  copartner  am  entitled  to  be  heard  on 
the  question  of  how  industry  shall  be  conducted — (i.  e., 
on  the  hours  of  work,  the  question  of  physical  safety  and 
insurance)  and  am  entitled  to  have  a  voice  as  to  my 
share  in  the  proceeds  of  industry." 

All  the  so-called  problems  of  labor,  from  that  of  the 
closed  shop,  the  boycott  and  restriction  of  output,  to 
that  of  the  open  shop,  the  black  hst  and  pace-setting, 
result  from  a  lack  of  harmony  between  these  two  view- 
points. The  interests  of  labor  and  capital  may  be 
harmonious  in  the  long  run,  but  as  a  practical  problem, 
the  present  interests  of  employes  and  the  employers 
often  seem  to  conflict.  It  is  to  the  immediate  interest  of 
the  employer  to  get  all  out  of  his  men  within  reasonable 
limits  that  he  can  for  as  low  wages  as  possible,  while  the 
employe  is  interested  in  getting  as  high  a  return  for  his 
services  as  he  can  command. 

There  is  thus  in  the  eyes  of  both  groups  a  see-saw 
relation  between  profits  and  wages.  As  one  goes  up, 
the  other  correspondingly  falls.  On  this  antagonism 
of  immediate  interests  rests  the  whole  labor  problem. 

413 


414?  ECONOMICS 

One  must  face  this  issue  squarely  before  he  can  com- 
prehend the  labor  movement.  With  the  growth  of 
capital  and  its  rapid  concentration,  labor  soon  saw  that 
it  must  accept  the  commodity  status  assigned  to  it  by 
capital  or  combine  as  capital  had  done,  and  so  through 
the  increased  power  thus  gained,  assert  its  claims.  The 
result  was  the  rise  of  the  institution  known  as  the  labor 
union. 

333.  Aims  of  the  union. — Unless  one  can  fully  ap- 
preciate the  fact  that  the  union  is  one  of  the  great  social 
institutions  performing  services  not  now  adequately  per- 
formed by  any  other  social  agency,  he  cannot  under- 
stand the  labor  movement — much  less  criticise  it.  The 
more  one  studies  the  growth  of  the  labor  movement  in 
America,  the  more  one  loses  patience  with  the  attitude 
of  mind  which  summarizes  its  position  on  the  question 
by  merely  stating  that  it  is  "for  or  against  the  unions." 
That  unions  are  perfect,  few  will  contend ;  that  they  are 
wholly  bad,  few  will  admit.  That  they  form  one  of  our 
great  social  institutions,  with  a  complexity  as  great  as 
modern  life  itself;  that  they  constitute  an  institution 
solving  its  problems  slowly  and  sometimes  with  mistakes, 
— all  must  realize  who  have  examined  into  the  evidence. 

The  union  is  reaching  down  and  taking  hold  of  the 
one  sole  possession  of  the  great  body  of  men — ^their 
labor — and  is  using  its  growing  power  to  guard  and 
protect  that  labor  and  its  possessor  so  that  its  return  will 
not  only  cover  the  workingman's  cost  of  producing  his 
labor,  but  will  bring  to  him  a  larger  share  of  the  wealth 
which  he  assists  in  producing. 

The  union  stands  as  a  protest  against  the  condition 
which  obtains  in  the  great  industrial  city  of  Pittsburgh, 
where  the  wages  of  a  great  majority  of  the  laborers  em- 
ployed by  the  mills  is  inadequate  for  the  maintenance 


THE  LABOR  PROBLEM  415 

of  a  normal  American  standard  of  living;  wages  ad- 
justed to  the  single  man  in  the  lodging  house,  not  to 
the  responsible  head  of  a  family.  The  trade  union 
recognizes,  first  of  all,  that  labor  has  a  cost  of  production 
just  as  certain  as  coal  or  shoes  or  any  other  material 
commodity.  This  cost  may  not  be  and  is  not  represented 
in  royalties,  interest,  wages,  freight  rates,  etc.,  as  is  the 
case  with  the  cost  of  producing  coal,  but  it  is  made  up 
of  items  which  are  just  as  much  subject  to  definite 
analysis — of  food,  clothing  and  shelter.  To  meet  this 
cost  of  producing  labor,  the  only  thing  the  workingman 
Can  do  is  to  sell  his  commodity — his  labor — that  is,  he 
must  apply  his  physical  energy  to  the  transformation  of 
material  goods  in  return  for  money  wages  by  means  of 
which  he  secures  food,  clothing  and  shelter. 

But  to  reduce  wages  to  its  mere  cost  of  production, 
i.  e.,  to  a  basis  which  will  just  supply  the  elemental  needs 
of  all  men  of  food,  clothing  and  shelter,  loses  sight  of 
the  fact  that  the  laborer  is  also  a  man  with  duties  and 
obligations  and  rights  as  a  citizen,  as  a  father  and 
husband.  The  welfare  of  a  nation  means  nothing,  if 
not  the  welfare  of  the  people  and  the  vast  majority  of 
the  nation  are  dependent  for  their  chief  source  of  income 
on  the  wage  contract.  As  Dr.  Frank  J.  Warne  points 
out  in  impartial  and  scholarly  studies  of  the  unions  made 
at  first  hand: 

The  trade  union  not  only  emphasizes  higher  money  wages  for 
the  working  classes,  but  it  seeks  to  secure  for  them  better  homes, 
(not  merely  better  houses),  lower  prices  for  the  commodities  they 
consume,  ( as  through  cooperative  establishments  and  by  opposi- 
tion to  "company"  stores),  more  opportunities  for  their  children 
in  the  schoolhousc,  better  clothes  and  food  for  their  wives  and 
children,  greater  safeguards  against  injury  and  death  in  haz- 
ardous employments,  insurance  and  relief  benefits,  less  hours  of 


416  ECONOMICS 

work,  and  innumerable  other  "rights"  which  they  do  not  now 
enjoy  and  which  will  ever  be  denied  to  them  if  they  themselves 
do  not  control,  through  the  trade  union,  the  forces  which  are 
ever  at  work  to  bring  about  low  wages  and  adverse  conditions  of 
employment.  All  these  and  other  objects  of  the  trade  union 
have  to  do  with  the  workingman  more  as  a  man  than  as  a 
producer  of  labor — ^as  a  social  animal  rather  than  a  labor-pro- 
ducing machine. 

A  fact  which  should  never  he  overlooked  in  discussing 
the  trade  union  is  that  it  is  the  only  method  left  to  labor 
whereby  it  can  combat  the  forces  which  are  ever  at  work 
to  bring  about  low  wages  and  adverse  conditions  of 
employment.  One  should  dissociate  from  the  word 
"forces"  as  used  in  the  above  sense  any  idea  of  personal- 
ity^ It  is  not  so  much  the  idea  of  a  personal  capitalist 
"grinding  down  the  faces  of  the  poor"  which  is  at  the 
root  of  the  labor  question  as  it  is  the  fact  that  some  eco- 
nomic forces  now  at  work  in  this  country  of  their  own 
operation  tend  to  bring  about  low  wages.  The  law  is 
understood  by  all  business  men.  It  is  merely  a  phase  of 
the  general  truth  that  the  article  offered  for  sale  at  the 
lowest  price  drives  its  competitors  from  the  market. 
Under  a  free  competitive  system  in  the  labor  market,  as 
would  be  the  case  were  there  no  unions,  the  man  with  the 
lowest  standard  of  living  must  displace  the  man  with  the 
higher  standard.  This  is  not  necessarily  the  fault  of 
the  employer.  Under  a  competitive  system  he  must  get 
his  labor  as  cheaply  as  his  competitors  or  he  himself  is 
forced  to  the  wall.  So  that  it  is  largely  the  economic 
forces  which  tend  to  force  wages  down  which  the  union 
opposes.  That  this  is  no  bit  of  theory  is  apparent  to 
all  who  know  anything  of  the  Slav  invasion  of  the 
anthracite  coal  mines  of  Pennsylvania.  The  whole  dis- 
turbance in  that  particular  industry  culminating  in  the 


THE  LABOR  PROBLEM  417 

famous  coal  strike  of  1902  was  the  result  of  a  conflict 
of  standards  of  living — the  American  and  the  Slavic — 
which  resulted  in  each  case  in  a  victory  for  the  Slavic 
until  the  LTnion  was  able  after  a  successful  strike  to 
check  the  tide. 

334.  The  wage-worker  as  a  bargainer. — The  union 
principle  is  that  found  in  the  old  adage  "In  union  there 
is  strength."  Under  the  conditions  of  modern  industry 
where  all  the  tools  of  production  are  in  the  hands  of  one 
group  the  single-handed  individual  laborer  is  not  in  a 
position  to  make  a  fair  bargain  for  his  wages.  A  fair 
bargain  implies  more  or  less  of  equality  between  those 
making  it.  A  man  who  is  in  a  position  where  he  must 
take  either  what  is  offered  him  or  do  without,  is  not  in 
any  real  sense  making  a  bargain  or  contract.  The  union 
steps  in  at  this  point  to  place  labor  in  a  position  where  it 
can  bargain  for  itself,  for  just  in  proportion  as  the 
laborers  stand  shoulder  to  shoulder  can  they  make  their 
demands  known  and  felt. 

It  is  hardly  conceivable  that  any  group  of  men 
struggling  to  maintain  their  standard  of  living,  or  any 
group  of  men  unused  to  power  which  they  suddenly  find 
within  their  grasp,  should  at  all  times  act  wisely.  Nor 
should  we  expect  among  organizations  numbering  over 
three  million  men  an  equal  degree  of  intelligence,  high 
purpose  and  lack  of  ability.  Like  all  other  institutions 
there  may  be  good  and  bad  organizations  among  them. 
It  is  not  the  purpose  of  this  chapter  to  discuss  particular 
unions,  nor  particular  epochs  in  unionism,  but  rather  to 
speak  of  the  broad  problems  of  labor. 

335.  The  closed  shop. — Among  the  so-called  abuses  of 
the  union  is  the  policy  of  the  closed  shop.  It  is  impos- 
sible to  pass  any  general  verdict  on  the  justice  of  this 
policy.     Most  Americans  are  inclined  to  condemn  it  ofF- 

1—27 


418  ECONOMICS 

hand  as  an  attempt  to  deprive  the  non-union  man  of  his 
"sacred  right  to  work."  They  forget  that  the  union 
man  enforces  the  closed  shop  poHcy  by  an  exercise  of 
his  "sacred  right  of  quitting  work."  Two  equally 
"sacred  and  unalienable  rights"  clash  in  this  contest. 
The  philosophy  of  social  expediency  and  not  the 
philosophy  of  rights  can  decide  such  a  question.  All 
the  surrounding  circumstances  must  be  gone  into  before 
one  can  justify  or  condemn  the  policy  of  a  closed  shop. 
There  is  nothing  inherently  wrong  in  the  policy  of  a 
closed  shop  provided  it  is  maintained  for  lawful  ends, 
chief  of  which  is  the  guarantee  of  an  Amercan  standard 
of  living  to  American  workmen. 

336.  The  boycott. — The  boycott  is  another  of  the  so- 
called  abuses  of  the  labor  union.  It  is  an  organized 
refusal  on  the  part  of  a  group  of  persons  to  buy  goods 
from  another  person  or  group  of  persons.  The  boycott 
is  thus  the  weapon  of  the  worker  and  the  general  public. 
Occasionally  it  is  used  by  business  houses  against  each 
other,  but  in  general  it  is  confined  to  the  workers  and  the 
general  pubhc. 

A  boycott  may  be  of  several  classes,  some  of  which 
the  courts  view  as  legal  and  others  not.  There  is  first 
the  simple  boycott  in  which  a  group  of  workers  who  have 
been  working  for  a  certain  man  refuse  to  buy  his  prod- 
ucts. Boycotts  usually  originate  in  this  way,  but  they 
soon  extend  to  the  second  form  or  compound  boycott. 
In  a  compound  boycott  the  workmen  directly  interested 
in  injuring  the  boycotted  person  or  persons,  enlist  the 
cooperation  of  third  parties.  Instead  of  the  employes 
of  John  Smith  getting  together  and  refusing  to  buy 
his  hats,  they  go  out  into  the  highways  and  byways  and 
advise  their  friends,  relatives  and  neighbors  not  to  buy 
hats  made  by  Smith.     The  third  form  of  boycott  is 


THE  LABOR  PROBLEM  419 

negative  in  its  effects.  It  takes  the  form  of  a  fair  list 
or  white  list.  The  union  periodical  prints  a  list  of  firms 
which  are  described  as  "fair,"  that  is,  union  hours  and 
union  wages  obtain  throughout  their  plants.  The  Con- 
sumers' League  also  publishes  what  they  call  a  "White 
List,"  which  is  a  list  of  firms  which  do  not  violate  factory 
laws  and  which  conform  to  certain  regulations  prescribed 
by  the  League.  The  fourth  form  of  boycott  is  the  "un- 
fair" list,  or,  as  it  has  been  called,  the  "we  don't  patron- 
ize" list.  The  labor  periodical,  instead  of  publishing  the 
names  of  firms  who  provide  fair  conditions  for  their 
employes,  publishes  the  names  of  firms  who  do  not 
provide  fair  conditions. 

The  second  form  of  boycott  is  regarded  as  a  con- 
spiracy. The  fourth  form  of  boycott  has  been  prohibit- 
ed in  some  cases  by  the  courts.  Both  forms  have  de- 
veloped remarkably  and  their  use  has  become  quite 
extensive.  The  power  which  labor  unions  derive  from 
using  them  is  in  some  cases  very  great.  Since  some 
recent  court  decisions,  however,  the  effectiveness  of  the 
boycott  from  the  standpoint  of  the  worker  is  materially 
lessened. 

The  boycott  is  one  of  the  problems  of  labor  which 
must  be  left  for  settlement  to  the  American's  sense  of 
fair  play  as  reflected  in  the  courts.  By  manj^  employers 
the  boycott  is  arraigned  as  among  the  most  "objection- 
able" features  of  organized  labor.  So  strong  is  this 
feeling  that  there  exists  to-day  an  American  Anti- 
Boycott  Association,  which  is  national  in  scope. 

337.  Opposition  to  machinery. — It  has  often  been 
urged  against  unions  that  they  have  opposed  the  in- 
troduction of  new  machinery  and  so  blocked  progress. 
That  this  has  been  true  in  the  past  to  a  certain  extent, 
cannot  be  denied.     That  it  is  becoming  less  and  less 


420  ECONOMICS 

customary  is  equally  true.  There  is  a  justifiable  ground 
on  which  unions  may  oppose  a  too  rapid  introduction  of 
machinery,  which  temporarily  and  in  particular  occupa- 
tions tends  to  reduce  wages.  That  the  opposition 
should  be  to  the  introduction  of  new  machines  at  any 
time  or  under  any  conditions  cannot  be  justified  from 
any  viewpoint. 

338.  Efforts  to  restrict  trade  unions, — These  have 
been  largely  through  the  courts  and  through  employers' 
associations,  (a)  Through  the  courts:  This  has  been 
by  the  instrumentality  of  the  injunction,  which  is  an  or- 
der of  the  court  commanding  a  person  or  group  of  per- 
sons to  refrain  from  doing  the  thing  or  things  specified 
in  the  order.  It  is  issued  on  the  ground  of  preventing 
damages  which  would  be  irreparable  if  the  case  were 
permitted  to  go  through  the  regular  processes  of  law. 

The  injunction  is  a  most  effective  means  by  which  to 
control  the  actions  of  strikers.  In  every  strike  some 
kind  of  coercion  is  resorted  to.  This  coercion  varies 
from  the  peaceful  visit  to  a  strike-breaker's  house,  and  an 
argument  which  aims  to  convince  him  that  he  should 
join  the  union  or  at  least  cease  breaking  the  strike,  to  the 
riot  or  some  other  form  of  physical  violence  against  the 
person  of  the  strike  breaker.  In  many  strikes  the  vio- 
lence extends  to  the  property  of  the  employer  as  well 
as  to  the  body  of  the  strike  breaker. 

The  injunction  is  effective  because  it  must  be  obeyed 
absolutely.  There  is  no  process  of  law  involved  in 
forcing  this  obedience.  The  court  is  the  direct  agent 
of  the  executive  and  legislative  authorities  in  this  re- 
spect, and  its  orders  are  backed  by  all  the  power  of  the 
state  or  nation. 

The  punishment  for  offenses  against  injunctions  is 
limited  only  by  the  discretion  of  the  court.     There  is 


THE  LABOR  PROBLEM  421 

no  limit  governing  the  severity  of  penalties,  other  than 
the  desire  of  the  judge  to  enforce  obedience  to  his  orders. 
The  penalties  may  be  reviewed  by  a  higher  court,  but 
the  latter  hesitates  to  overrule  the  attempts  of  a  col- 
league to  punish  "contempt  of  court." 

While  the  injunction  is  thus  cited  by  the  employer  as 
the  most  valuable  and  most  effective  means  of  protect- 
ing his  property  against  strikers,  it  is  in  the  same  pro- 
portion opposed  by  the  labor  union.  The  injunction 
has  proved  a  most  effective  weapon  in  overthrowing 
union  control.  The  power  of  the  union  rests  on  two 
things:  First,  the  right  of  the  members  to  bargain 
collectively  with  the  employer;  and,  second,  the  power 
to  enforce  demands  by  a  strike  which  has  at  least  a  rea- 
sonable chance  of  being  successful.  The  use  of  the  in- 
junction to  restrain  the  strikers  has  taken  from  them  the 
opportunity  of  resorting  to  many  acts  which  were  or- 
dinarily used  as  the  weapons  for  winning  strikes.  By 
decreasing  the  possibility  of  successful  strikes,  the  court 
has  decreased  the  possibility  of  effective  trade  unions. 
The  foundation  of  the  trade  union  is  at  stake,  and  the 
whole  energy  of  the  union  is  bent  against  "government 
by  injunction."  In  proportion  as  the  employers  have 
resorted  to  injunction  and  secured  from  the  various 
courts  an  extension  of  its  scope,  the  various  unions  have 
opposed  its  use  constantly  and  bitterly,  and  have  been 
for  some  time  endeavoring  to  secure  a  federal  law  which 
would  prevent  the  forms  of  injunctions  which  have  been 
so  disastrous  to  labor  union  interests. 

(b)  Through  employers'  associations:  The  last  dec- 
ade has  seen  the  rise  of  associations  among  employers 
to  curb  the  growing  power  of  the  unions.  Formerly 
there  were  times  when  one  employer  would  welcome  and 
even  encourage  a  strike  against  a  rival  concern  for  the 


422  ECONOMICS 

purpose  of  embarrassing  him.  They  soon  learned  that 
such  practice  did  not  pay,  as  a  successful  strike  in  a  rival 
plant  but  paved  a  way  for  successful  strike  in  their  own. 
As  an  outcome  we  have  the  rise  of  employers'  associa- 
tions, which  fight  labor  organizations  with  their  own 
weapons,  matching  the  lockout  against  the  strike,  the 
black  Hst  against  the  boycott,  and  the  "labor  bureau" 
against  the  "unfair  list"  of  the  trades  union  journals. 
Most  of  the  employers'  associations  have  associated 
themselves  for  common  action  in  a  large  national  federa- 
tion, the  Citizen's  Industrial  Association  of  America,  in 
which  in  December,  1903,  there  were  affiliated  sixty  na- 
tional employers'  associations,  sixty-six  state  and  dis- 
trict associations,  and  three  hundred  and  thirty-five  local 
or  municipal  associations  of  employers. 

One  of  the  most  prominent  of  these  associations  is  that 
knovm  as  the  National  Association  of  Manufacturers, 
representing  many  of  the  prominent  manufacturing  in- 
terests of  the  country.  In  1907  a  fund  of  a  million  and 
a  half  dollars  was  agreed  upon  as  a  requisite  amount 
for  the  expenditures  necessary  for  the  next  three  years  in 
carrying  on  their  campaign  of  education.  They  stand 
opposed  to  many  practices  of  the  union  and  desire  to 
see  an  increase  in  technical  education  throughout  the 
country.  They  hope  to  win  the  public  to  their  view- 
point by  instituting  a  series  of  lectures  and  printing 
numerous  tracts  on  the  subject.  Some  of  the  men  who 
are  most  prominent  and  active  in  this  association  have 
been  fighting  vigorously  for  many  years  against  labor 
strikes  and  boycotts. 

Some  other  of  employers'  associations  assume  a  more 
militant  attitude  than  the  National  Association  of  Man- 
ufacturers and  may  be  correctly  described  as  "union 
smashers."     Such   associations   have   little   regard   for 


THE  LABOR  PROBLEM  423 

the  establishment  of  sound  principles  of  collective  bar- 
gaining, and  they  are  usually  violently  opposed  to  any 
recognition  of  organized  labor;  their  aim  is  to  weaken 
and  harass  their  enemy,  the  labor  organization,  when- 
ever possible. 

339.  Methods  of  conciliation  and  arbitration. — From 
the  standpoint  of  the  employer,  the  employe  and  the 
general  public  strikes  and  lockouts  are  far  from  un- 
mixed blessings.  The  end  that  they  intend  to  accom- 
plish may  be  good,  but  the  means  are  wasteful  and  un- 
economic. Production  ceases,  profits  and  wages  stop, 
property  may  be  destroyed,  and  the  public  is  deprived 
of  some  article  of  consumption  or  else  compelled  to  pay  a 
higher  price  for  it.  Such  being  the  case,  it  is  not  sur- 
prising that  steps  should  early  be  taken  to  avoid  a 
method  of  settling  industrial  disputes  analogous  in  some 
ways  to  settling  breaches  of  contract  by  street  fights. 
Many  schemes  have,  in  fact,  been  proposed,  and  they 
group  themselves  under  four  headings,  the  first  of  which 
is  the  trade  agreement.  The  trade  agreement  is  merely 
a  collective  bargain.  Once  a  year  or  once  every  two 
years  a  committee  appointed  by  the  employers  meet  one 
appointed  by  the  workers,  and  these  two  committees  go 
over  the  question  of  wages,  hours,  and  working  condi- 
tions, discuss  the  outlook,  and  decide  on  the  conditions 
which  shall  govern  the  trade  during  the  period  of  a  year 
or  for  as  long  as  the  agreement  may  be  made.  At  the 
end  of  this  time  another  session  is  held,  the  committees 
go  over  the  ground  again,  and  endeavor  to  reach  a  con- 
clusion for  the  succeeding  period.  This  method  of 
avoiding  strikes  has  proved  eiFectual  in  many  cases  which 
involve  reliable  unions,  such  as  railroad  brotherhoods,  the 
boot  and  shoe  workers,  the  miner's  unions  and  many  oth- 
ers.    A  large  number  of  union  differences  are  settled 


424.  ECONOMICS 

quietly  by  means  of  collective  bargains  or  trade  settle- 
ments for  specific  periods,  which  are  renewed  from  time 
to  time  as  they  fall  due.  By  such  a  simple  method  as 
this,  peace  in  the  coal  fields  of  Pennsylvania  was  again 
assured  in  1909  for  at  least  the  next  three  years,  by  an 
agreement  entered  into  by  the  coal  operators  and  the 
representative  of  the  miner's  union. 

If  it  can  be  put  into  practice,  the  collective  bargain  is, 
after  all,  the  ideal  method  of  settling  labor  disputes. 
No  outside  labor  force  need  be  imposed,  and  the  two 
parties  by  getting  together  can  settle  their  difference  in 
a  way  satisfactory  to  both.  Now  and  then  a  disagree- 
ment and  a  strike  may  result  from  this  method  of  bar- 
gaining, but  as  a  rule  it  works  in  a  most  commendable 
way. 

The  second  form  of  strike  preventive  is  the  voluntary 
submission  of  the  points  at  issue  to  an  arbitration  board 
of  three  members,  one  appointed  by  the  workers,  one 
appointed  by  the  employers,  and  the  third  selected  by 
these  two.  This  method  of  settling  differences  is  much 
less  satisfactory  than  the  trade  agreement,  and  the  con- 
clusion is  reached  by  third  parties  who  are  not  always 
directly  interested  in  the  problems,  and  both  of  the  con- 
tending elements  may  therefore  be  dissatisfied  with  the 
result.  This  form  of  voluntary  arbitration  is  negligible 
in  its  importance  so  far  as  labor  disputes  are  concerned. 

The  third  form  of  strike  preventive  is  the  voluntary 
state  board  of  arbitration.  This  form,  which  has  been 
fairly  well  worked  out  in  some  of  the  American  states, 
provides  that  the  governor  of  the  state  shall  appoint  a 
number  of  men  in  the  various  districts  who  are  always 
prepared  to  act  as  a  board  of  arbitration,  provided  one  or, 
in  some  cases,  both  of  the  parties  in  the  controversy  re- 
quest the  state  board  to  act.     Except  in  a  few  cases  this 


THE  LABOR  PROBLEM  4^5 

form  of  arbitration  is  likewise  unsatisfactory  and  is 
seldom  resorted  to. 

The  fourth  form  of  strike  preventive  is  compulsory 
arbitration,  a  distinctively  Australasian  experiment. 
Under  this  method  of  settling  difficulties  strikes  and 
lockouts  are  forbidden  under  penalty.  When  indus- 
trial questions  arise,  they  must  be  submitted  to  the  prop- 
erly constituted  local  authorities,  who  decide  the  points  at 
issue  in  exactly  the  same  way  as  a  court  of  law  decides 
legal  points.  The  advocates  of  this  system  of  compul- 
sory arbitration  hold  that  it  is  just  as  ridiculous  to  allow 
a  trade  union  and  an  employer  to  fight  out  their  differ- 
ences as  it  would  be  to  allow  a  man  whose  contract  had 
been  broken  to  go  out  and  thrash  the  man  who  was 
guilty  of  breach  of  contract.  In  both  cases  the  power 
of  the  state  should  be  invoked  to  punish  the  offender  and 
to  do  justice  to  the  person  injured.  The  Australasian 
system  is  merely  a  system  of  individual  judiciary  worked 
out  on  the  same  principles  as  the  law  courts  and  having 
jurisdiction  over  disputes  between  employer  and  em- 
ployes. 

Whatever  shall  prove  to  be  the  ultimate  method  of 
settling  industrial  disputes,  certain  it  is  that  we  are 
approaching  the  time  when  the  decisions  shall  rest  more 
and  more  on  an  appeal  to  reason  and  less  and  less  on 
an  appeal  to  force.  The  labor  problem  is  too  momen- 
tous an  issue  to  be  decided  on  other  than  the  most  en- 
lightened grounds.  In  its  proper  solution  rests  the 
progress  and  prosperity  of  the  whole  nation.  The 
American  labor  force  is  the  cornerstone  of  our  greatness. 
It  is  our  most  valuable  resource  and  any  nation  which 
exploits  its  resources  with  no  thought  of  the  morrow 
must  ultimately  pay  the  penalty — especially  if  that  re- 
source be  labor. 


QUIZ  QUESTIONS 

(The  numbers  refer  to  the  numbered  sections  in  the 

text) 

PART  I:    PRODUCTION 

CHAPTER  I 

1.  Define  economics.  Define  wealth.  What  is  the 
distinction  between  free  and  economic  goods? 

2.  Describe  the  origin  of  private  property.  What 
does  Blackstone  mean  by  "community  of  ownership?" 

3.  What  are  the  provisions  of  the  right  of  private 
property?  What  restrictions  does  society  impose  on 
this  right?     Illustrate  why? 

4.  How  does  the  state  limit  the  right  of  private  prop- 
erty? 

5.  What  effect  have  public  improvements  upon  the 
right  of  private  property?  Why  does  not  this  seem  a 
restraint?     Explain  the  doctrine  of  "eminent  domain." 

6.  How  do  the  rights  of  private  property  affect  in- 
dividuals? Why  is  it  that  men  will  not  produce  more 
than  they  need?  Show  the  effect  of  immigration,  using 
a  bank  as  an  illustration. 


CHAPTER  II 

7.  What  is  the  distinction  between  utility  and  useful- 
ness?   Define  and  illustrate  an  act  of  production. 

427 


428  ECONOMICS 

8.  Describe  the  four  principal  forms  of  production 
and  give  illustrations  of  each. 

9.  Explain  time  utility. 

10.  Define  and  illustrate  possession  utility. 

11.  What  are  the  agents  or  factors  in  production? 
Which  are  primary  and  which  are  secondary? 


CHAPTER  III 

12.  What  function  does  Nature  perform  in  the  pro- 
duction of  wealth?  Define  what  is  meant  by  "free 
goods  of  Nature,"  and  show  how  their  supply  affects 
human  progress. 

13.  Give  changes  in  form  and  place  required  by  pro- 
duction. Upon  what  does  the  industrial  future  of  this 
country  depend? 

14.  What  part  does  Nature  play  in  production? 
What  is  the  most  important  natural  source  of  power  in 
this  age? 

15.  What  other  properties  of  goods  affect  produc- 
tion? 


CHAPTER  IV 

16.  Define  labor.  Is  it  possible  to  discriminate  be- 
tween the  respective  contributions  of  brain  and  muscle? 

17.  What  is  the  effect  of  labor  upon  production? 
According  to  Mill  upon  what  does  man's  labor  depend 
for  its  results? 

18.  What  qualities  determine  efficiency?  Under 
what  three  heads  are  they  classed? 


QUIZ  QUESTIONS  429 

19.  Upon  what  does  physical  efficiency  of  labor  de- 
pend? To  what  movement  has  a  realization  of  this 
given  rise?    Where  did  it  originate? 

20.  Give  the  important  results  of  this  movement 
upon  the  industrial  world.  What  has  been  done  to  bet- 
ter hygienic  conditions? 

21.  What  does  Mr.  Outerbridge  say  as  to  the  im- 
proved systems  of  industrial  management?  Does  he 
base  his  views  entirely  upon  philanthropic  grounds?  If 
not,  why? 

22.  In  what  respects  does  the  state  protect  the  wel- 
fare of  employes.  Is  the  legislation  uniform  through- 
out the  United  States?  What  are  the  four  important 
restrictions  on  child  labor? 

23.  Do  employers  further  their  interests  by  possess- 
ing the  good  will  of  their  employes?  What  should 
and  should  not  be  considered  the  duties  of  the  em- 
ployer to  his  employes? 

CHAPTER  V 

24.  What  are  the  effects  of  inheritance  upon  the 
mental  efficiency  of  labor?  of  education?  of  a  good 
home? 

25.  What  is  the  capital  value  of  (1)  unskilled  labor; 
(2)  shop  trained  or  apprentice;  (3)  trained  in  trade 
schools;  (4)  educated  in  higher  technical  schools? 
What  conclusion  do  you  draw  from  these  figures? 

26.  Why  can  a  technically  trained  man  command  a 
high  salary?     What  does  this  fact  illustrate? 

27.  What  is  the  effect  of  preliminary  training  in  the 
field  of  business?  What  is  reasoning?  How  does  the 
power  to  reason  influence  success  in  business? 

28.  What  is  the  present  relation  in  the  United  States 


430  ECONOMICS 

between  the  modern  commercial  and  industrial  under- 
takings and  the  universities? 

29.  What  evil  effect  have  modern  industrial  methods 
had  upon  labor?     What  has  been  done  to  remedy  it? 

30.  Describe  the  first-class  apprentice  system.  What 
are  the  other  classes?  What  positions  do  men  from 
each  of  the  three  classes  fill? 

31.  What  is  the  form  of  preliminary  training  for 
shop  superintendents?    What  is  its  chief  advantage? 

32.  Generally  speaking,  upon  what  does  a  laborer's 
honesty  depend?  Upon  what  does  his  ambition  de- 
pend? 

CHAPTER  VI 

33.  Is  the  labor  of  women  and  children  economical? 
Why  is  the  inefficiency  of  woman  and  child  labor  no 
bar  to  their  employment?  What  does  the  census  of 
1900  show  as  to  child  labor?  Why  is  the  child  labor 
problem  in  the  South  particularly  difficult? 

34.  What  are  the  moral  and  physical  effects  of  child 
labor?  What  essential  feature  in  modern  factory  work 
is  particularly  harmful  to  the  child? 

35.  What  are  the  indirect  effects  of  child  labor  upon 
industry? 

36.  Why  is  child  labor  more  prevalent  in  new  in- 
dustries? In  what  two  ways  may  child  labor  be  con- 
sidered cheap? 

37.  How  extensive  is  the  entrance  of  American 
women  into  industry?  What  are  the  causes  of  this  en- 
trance? What  is  meant  by  the  standardization  of 
industry? 

38.  Why  can  women  work  for  lower  wages  than 
men?  What  types  of  industry  have  women  found  it 
easiest  to  enter? 


QUIZ  QUESTIONS  431 

39.  What  change  in  industrial  conditions  has  led  to 
the  great  influx  of  women  into  factories  ?     Illustrate. 

40.  Give  five  arguments  against  woman's  labor. 

41.  Give  eight  arguments  in  favor  of  women  in  in- 
dustry. 


CHAPTER  VII 

42.  Compare  primitive  man  with  civilized  man. 
What  has  spanned  the  gulf  between  the  two? 

43.  What  does  the  United  States  Census  Bureau 
state  as  the  wealth  of  this  country?  Into  what  sub- 
divisions is  the  capital  of  the  United  States  divided? 
Distinguish  between  consumption  goods  and  capital 
goods. 

44.  What  is  the  service  of  capital  in  production? 
What  methods  of  production  illustrated  in  the  quota- 
tion may  be  considered  capitalistic? 

45.  What  is  the  relation  between  the  efficiency  of 
capitalistic  production  and  its  indirection?  What  is 
meant  by  the  direct  method  of  production  and  by  the 
indirect?     Illustrate  the  diff'erence. 

46.  Show  how  a  fishing  vessel  illustrates  capitalistic 
production. 

47.  What  long  series  of  productive  acts  might  be 
caused  by  an  increase  of  the  flour  trade  between  China 
and  the  United  States? 

48.  Define  saving.  What  does  the  production  of 
consumable  goods  necessitate? 

49.  In  what  way  does  the  amount  of  saving  depend 
on  the  financial  condition  of  the  country?     Illustrate. 

50.  Why  is  saving  necessary? 

51.  What  ^re  the  two  important  expense  accounts  on 


432  ECONOMICS 

the  books  of  all  railroads?     What  form  of  saving  do 
they  illustrate?     What  is  the  underlying  principle? 

52.  What  is  meant  by  depreciation?  Illustrate. 
Why  is  depreciation  difficult  to  estimate? 

53.  What  is  meant  by  the  consumption  of  capital? 

54.  Distinguish  between  productive  and  unproduc- 
tive consumption.  In  what  way  may  the  statement  that 
the  expense  of  war  is  unproductive  consumption  be 
qualified. 

55.  Show  the  difference  between  the  economically 
useless  man  and  the  economically  useful. 

CHAPTER  VIII 

5Q.  What  are  the  three  factors  in  production? 
Can  they  effect  anything  in  production  singly?  What 
is  meant  by  the  division  of  labor? 

57.  Show  how  the  three  factors  of  production  are 
combined  in  each  of  the  eight  processes  in  the  manu- 
facture of  woolen  goods.  How  does  Adam  Smith  illus- 
trate the  advantages  of  the  division  of  labor? 

58.  What  is  the  universal  characteristic  of  modern 
industry?  In  what  forms  has  the  division  of  labor 
existed  from  the  beginning  of  industrial  civilization? 

59.  How  does  the  division  of  labor  increase  the  ef- 
fectiveness of  production?  What  are  the  three  ad- 
vantages of  the  division  of  labor  discussed  by  Adam 
Smith.     Illustrate  each  one. 

60.  How  has  increased  specialization  affected  the 
period  of  preparation?  What  type  of  labor  has  been 
gradually  superseded  by  the  improvement  in  machine 
processes?     Illustrate. 

61.  Show  how  the  extreme  specialization  in  the  meat- 
packing industry  is  one  made  on  the  basis  of  skill. 


QUIZ  QUESTIONS  483 

62.  What  are  the  three  economies  affected  by  divi- 
sion of  labor?  Show  how  the  first  two  bring  about  the 
third. 

63.  Why  is  speciahzation  deplored?  How  can  it 
be  remedied  and  what  is  its  great  advantage? 

64.  Is  specialization  confined  to  individual  employ- 
ment? If  not,  why  not?  How  can  specialized  industiy 
meet  sudden  demand  in  the  market? 

65.  Illustrate  the  efi*ect  specialization  has  upon  costs. 

66.  Show  the  difference  in  cost  where  different  ma- 
chinery and  different  processes  are  used. 

67.  Give  an  illustration  from  the  manufacture  of  in- 
candescent burners. 

68.  What  is  meant  by  continuous  processes?  How 
are  they  made  possible?     Illustrate. 

CHAPTER  IX 

69.  What  is  the  effect  of  the  location  of  an  industry 
on  its  productivity?  What  determines  the  location  of 
industry?  What  freight  regulations  have  great  in- 
fluence on  the  location  of  industry? 

70.  What  part  does  climate  play  in  the  location  of 
industry?  In  what  way  may  the  climate  handicap  an 
industry? 

71.  What  influence  does  the  perishability  of  materials 
have  upon  the  location  of  industry? 

72.  How  does  the  supply  of  fuel  and  water-power 
affect  the  location  of  industries?  What  new  source  of 
power  is  having  an  increasingly  important  bearing  upon 
the  location  of  industry? 

73.  What  phase  of  industry  does  the  Armour's  pack- 
ing plant  illustrate  ?  Give  an  instance  of  the  utilization 
of  surplus  labor? 


434.  ECONOMICS 

74.  Show  what  kinds  of  industries  have  their  locations 
influenced  by  the  residence  of  the  consumer. 

75.  Show  how  specialization  of  labor  may  determine 
the  location  of  an  industry. 

76.  What  types  of  industry  are  influenced  in  their  lo- 
cation by  the  cheapness  of  labor?  What  is  the  "sweat- 
ing" system? 

77.  Upon  what  general  principle  does  industry  tend 
to  arrange  itself?  What  are  the  reasons  for  the  opera- 
tion of  this  principle? 

78.  Give  the  main  reasons  for  Pittsburgh's  impor- 
tance as  the  center  of  the  iron  and  steel  trade  ? 

79.  Why  is  coke  the  best  fuel  for  iron  smelting? 

CHAPTER  X 

80.  Define  large-scale  production.  Why  is  the  term 
an  indefinite  one?  Give  an  illustration  of  large-scale 
production.  What  has  made  large-scale  production 
possible? 

81.  What  eff*ect  has  large-scale  production  had  upon 
the  centralization  of  industry?     Illustrate. 

82.  What  are  the  advantages  of  large-scale  produc- 
tion? Is  large-scale  production  dependent  on  division 
of  labor? 

83.  In  large-scale  production  is  there  a  waste  of  by- 
products? What  advantages  does  the  large-scale  pro- 
ducer enjoy  as  to  improved  methods?  What  is  the 
chief  economy  of  large-scale  production? 

84.  What  are  the  essential  diff'erences  between  large 
and  small  concerns?     Illustrate. 

85.  In  introducing  new  functions  into  his  business 
what  does  the  large-scale  producer  expect  to  accom- 
plish?   When  is  it  practical  to  do  so? 


QUIZ  QUESTIONS  435 

86.  What  are  the  chief  causes  of  the  development  of 
large-scale  production?  What  influence  has  the  mod- 
ern transportation  system  had  upon  large-scale  produc- 
tion? 


PART  II:    EXCHANGE 

CHAPTER  I 

87.  What  was  the  average  output  of  the  individual 
laborer  in  1909?  What  did  these  figures  prove?  Why 
does  the  division  of  labor  necessitate  the  exchange  of 
products?  What  are  the  advantages  of  a  facile  ex- 
change ? 

88.  What  are  the  two  forms  of  exchange?  Is  the 
first  form  of  the  exchange  advantageous?  Give  rea- 
sons for  your  answer.  What  would  be  its  effect  upon 
the  division  of  labor? 

89.  What  is  meant  by  a  medium  of  exchange? 
What  led  to  its  being  employed?  What  are  the  four 
functions  of  money? 

90.  Give  examples  of  early  forms  of  media  of  ex- 
change.    What  requirements  did  they  fulfill? 

91.  Give  the  characteristics  of  a  medium  of  ex- 
change. Show  reason  for  each  characteristic.  What 
has  been  found  to  be  the  most  acceptable  medium  of  ex- 
change?   Why? 


CHAPTER  II 

92.  What  is  meant  by  a  unit  of  value?     Is  it  uniform 
throughout  the  world?     What  is  the  standard  dollar? 


436  ECONOMICS 

93.  By  what  do  gold  coins  in  the  United  States  meas- 
ure their  value?  What  are  the  two  classes  of  paper 
money  used  in  the  United  States? 

94.  What  can  be  said  of  the  relative  exchange  value 
of  paper  money  and  coin  in  the  United  States  ?  Why  is 
paper  money  taken  as  an  equivalent  of  gold? 

95.  How  are  national  bank  notes  kept  at  par  with 
gold?  What  are  the  three  reasons  for  public  confi- 
dence in  the  ability  of  the  government  to  keep  all  kinds 
of  money  at  par  with  gold? 

96.  What  is  meant  by  bimetallism?  What  part  has 
it  played  in  the  United  States  monetary  system?  What 
are  the  two  uses  of  precious  metals  ?  How  is  their  value 
regulated? 

97.  What  has  been  the  history  of  the  double  standard 
in  Europe  as  well  as  America?  What  has  been  the  re- 
sult? 

98.  Distinguish  between  convertible  and  non-con- 
vertible paper.  What  is  the  eifect  upon  prices  of  the 
issue  of  non-convertible  paper?  How  may  it  disturb 
foreign  commerce? 

99.  How  long  did  a  paper  basis  exist  in  the  United 
States?  What  was  its  effect  upon  the  value  of  a  dol- 
lar and  upon  prices  and  wages  in  general?  How  and 
when  was  paper  money  redeemed? 

CHAPTER  III 

100.  What  is  the  most  important  factor  in  exchange? 
Define  credit  in  its  various  forms. 

101.  What  are  the  functions  of  a  bank?  What  is 
the  actual  process  of  lending  money  as  engaged  in  by 
banks?  What  two  courses  are  open  to  the  borrower? 
Are  checks  legal  tender? 


QUIZ  QUESTIONS  437 

102.  What  is  the  result  of  the  use  of  credit  as  a 
medium  of  exchange?     Illustrate. 

103.  What  is  the  clearing  house?  How  does  it  fa- 
cilitate exchange?     Illustrate. 

104.  How  can  a  bank  use  checks  above  the  value  of 
its  deposits?    What  are  the  credit  funds  of  a  bank? 

105.  What  limits  a  bank's  issue  of  promises  to  pay? 

106.  To  what  extent  are  promises  to  pay  used  ?  Why 
are  these  promises  to  pay  taken  as  equivalent  to  gold? 
How  large  a  percentage  of  the  whole  number  of  ex- 
changes is  performed  by  the  uses  of  credit? 

107.  What  are  the  reasons  for  public  confidence  in  a 
bank's  credit?  Show  that  the  basis  of  confidence  in  a 
bank's  credit  is  almost  identical  with  that  of  govern- 
ment credit.  What  are  the  divisions  of  medium  of  ex- 
change in  the  United  States? 

CHAPTER  IV 

108.  Describe  the  district  system  of  national  bank 
organization.  State  the  prerequisites  for  formation  of  a 
national  bank. 

109.  What  are  the  principal  powers  of  national 
banks?  What  powers,  unless  prohibited,  have  state 
banks,  which  are  members  of  the  Federal  Reserve  Bank 
system?  What  powers  of  note  issue  have  Federal  re- 
serve banks? 

110.  What  rules  as  to  reserves  are  binding  upon 
Federal  reserve  banks?  Specify  the  reserves  necessary 
for  different  national  banks.  Who  are  the  managers 
of  a  national  bank?     State  liability  of  stockholders? 

111.  To  what  extent  is  the  Bank  of  England  under 
national  control?    How  great  is  its  cash  reserve? 


438  ECONOMICS 

112.  In  what  way  is  the  Bank  of  France  dependent 
on  the  government?  What  amount  of  reserve  does  it 
keep?    Why? 

113.  What  is  the  organization  of  the  Imperial  Bank 
of  Germany?  What  are  the  regulations  concerning 
note  issue  by  independent  banks  in  relation  to  the  Im- 
perial Bank?    How  is  the  Imperial  Bank  controlled? 

114.  What  has  been  shown  to  be  the  attitude  of  the 
four  governments  (United  States,  England,  France 
and  Germany)  concerning  the  issue  of  bank  notes? 
How  has  each  safeguarded  its  banking  system  in  this 
respect? 

115.  What  has  been  recently  proposed  in  the  United 
States  concerning  the  issue  of  bank  notes?  Illustrate 
the  causes  and  effect  of  a  stringent  money  market. 
What  are  the  proposed  remedies?  What  does  Profes- 
sor Johnson  say  as  to  the  effect  of  asset  bank  notes? 

CHAPTER  V 

116.  Define  value  from  an  economic  view.  What  is 
meant  by  marginal  utility?  Illustrate.  What  relation 
does  it  bear  to  value?  Show  how  the  value  of  a  com- 
modity is  affected  by  demand  and  supply. 

117.  In  what  is  the  value  of  a  commodity  always  ex- 
pressed? Illustrate  the  fact  that  money  is  the  only 
medium  of  exchange  in  modern  business.  Properly 
speaking,  is  money  the  thing  toward  which  the  producer 
is  working? 

118.  What  is  expressed  by  the  price  of  a  commodity? 
What  is  the  incentive  to  economic  activity?  How  is 
such  activity  rewarded?  Distinguish  between  cost  and 
price.  What  makes  up  the  former?  Which  of  these 
two  is  subject  to  the  greatest  fluctuations?     What  in- 


QUIZ  QUESTIONS  439 

fluence  does  this  fact  have  upon  profits  ?  What  conclu- 
sion may  be  drawn  as  to  the  relation  between  prices  and 
profits?  What  is  meant  by  a  change  in  the  level  of 
prices?  What  four  circumstances  are  responsible  for 
the  disturbing  effect  of  a  change  in  the  value  of  the 
standard?  Show  why  this  is  so.  Is  a  rise  or  fall  of 
prices  usually  uniform?  What  disadvantages  arise 
from  this  fact?  According  to  Professor  Johnson, 
what  would  constitute  the  industrial  millennium?  Un- 
der what  delusions  concerning  money  and  prices  does 
the  business  man  labor? 

119.  Upon  what  do  prices  depend?  Illustrate  the 
price-making  process.  What  are  the  functions  of  the 
Chicago  Board  of  Trade?  Show  by  an  illustration 
how  prices  are  determined  in  actual  practice. 

120.  What  factors  does  the  broker  take  into  account 
in  estimating  the  supply  of  wheat  ?  How  does  the  con- 
dition of  the  money  market  influence  the  supply? 
What  is  a  call  loan?  Why  does  the  business  man  bor- 
row? 

121.  What  are  the  factors  influencing  demand? 

122.  Ordinarily  how  do  these  factors  operate?  Illus- 
trate. Are  prices  sometimes  affected  when  these  fac- 
tors come  into  operation?  Give  reasons  for  your 
answer  ?  What  can  be  said  as  to  the  stability  or  instabil- 
ity of  prices? 

123.  What  is  the  ultimate  factor  in  determining 
prices?  What  is  the  upper  limit  of  prices?  What  is 
the  lower  limit?  What  happens  when  the  lower  limit 
is  reached?  Illustrate  the  effect  of  declining  prices 
upon  production. 

124.  What  has  been  the  fluctuation  of  prices  since 
1850?  What  has  been  the  cause  of  this  fluctuation? 
Why  are  the  fluctuations  of  price  likely  to  continue? 


440  ECONOMICS 

CHAPTER  VI 

125.  What  is  the  international  medium  of  exchange? 
In  international  payments  are  there  large  shipments  of 
gold? 

126.  What  is  meant  by  the  statement  that  Fall  River 
is  a  cotton  city?  In  what  ways  is  domestic  exchange 
aiFected?  What  conclusion  is  reached  as  to  the  pay- 
ment for  domestic  imports  and  exports? 

127.  How  does  the  method  of  domestic  exchange  cor- 
respond to  the  method  of  international  exchange? 

128.  In  what  two  ways  can  debts  between  two  coun- 
tries be  liquidated?     What  method  is  usually  employed? 

129.  Explain  the  working  process  of  buying  and  sell- 
ing foreign  credit?  Show  how  they  correspond  to 
methods  employed  in  domestic  business. 

130.  How  do  Americans  traveling  in  Europe  settle 
their  bills?  What  other  foreign  payments  does  the 
United  States  make? 

131.  Why  must  the  United  States  export  a  large 
surplus  of  commodities?     Give  statistics. 

132.  What  is  meant  by  the  international  income  ac- 
count? What  appears  on  the  debit  side  and  what  on 
the  credit?  Give  reasons  for  fluctuation  in  the  value 
of  foreign  exchanges.  What  are  the  Hmits  within 
which  the  value  of  exchange  may  vary? 


QUIZ  QUESTIONS  44.1 

PART  III:    DISTRIBUTION 

CHAPTER  I 

133.  Give  an  illustration  of  the  united  working  of 
the  three  factors  of  production.  What  are  the  four 
interests  in  every  business? 

134.  What  is  the  entrepreneur?  What  is  his  func- 
tion in  the  business  world?  What  is  his  relation  to  dis- 
tribution of  the  social  income? 

135.  What  are  the  three  forms  the  entrepreneur  may 
assume?     Why  is  individual  ownership  undesirable? 

136.  What  is  a  partnership?  How  is  it  formed? 
What  are  the  articles  on  co-partnership?  How  are 
they  drawn  up  ? 

137.  What  are  the  five  kinds  of  partners  and  the 
characteristics  of  each?  What  are  the  Uabilities  and 
rights  of  a  partner?  What  is  meant  by  the  capital  of 
the  partnership?  Why  is  the  name  of  a  partnership 
protected  by  law? 

138.  What  is  the  most  important  obligation  which 
partners  owe  to  each  other?  What  are  the  limitations 
of  a  partner's  authority?  How  are  proceedings  against 
partnerships  carried  on? 

.      139.  How  can  a  partnership  be  dissolved? 

140.  Define  a  corporation.  What  are  its  powers 
and  liabilities?  What  is  the  relation  between  stock- 
holders, directors  and  management?  What  is  a 
charter  of  a  corporation?  What  powers  have  the 
directors? 

141.  What  are  the  advantages  of  a  corporation  over 
a  partnership  ?  How  is  the  control  of  corporate  affairs 
held? 


44«  ECONOMICS 

142.  What  is  the  most  important  advantage  of  a  cor- 
poration? Is  a  corporation  a  popular  form  of  business 
organization  in  the  United  States  ? 

143.  Show  by  an  illustration  from  the  Reading  Coal 
and  Iron  Company  how  an  industrial  income  may  be 
distributed. 

144.  What  are  the  five  general  heads  under  which 
distribution  is  made. 


CHAPTER  II 

145.  What  is  one  of  America's  distinctive  contribu- 
tions to  the  business  world?  What  is  the  chief  function 
of  the  organizer?  What  type  of  man  makes  the  best 
organizer? 

146.  What  knowledge  must  the  organizer  possess? 

147.  What  industrial  conditions  in  the  United  States 
are  the  result  of  the  work  of  organizers?  What  is  his 
position  in  and  importance  to  the  community?  In  what 
ways  has  he  abused  his  position? 

148.  How  does  the  modern  organizer  win  his  place? 

149.  What  relation  does  the  manager  bear  to  the  or- 
ganizer? What  are  the  duties  of  the  manager?  Why 
is  his  position  less  difficult  than  that  of  the  organizer? 

150.  How  are  managers  trained  in  the  United 
States?  Show  how  industrial  conditions  are  favorable 
to  the  development  of  managers. 

151.  What  are  the  duties  of  a  boss?  What  methods 
does  the  boss  employ  to  increase  products?  What  type 
of  man  makes  an  efficient  boss? 

152.  Name  five  classes  of  employes  usually  found  in 
every  business.  What  is  the  distinction  between  skilled 
and  unskilled  labor? 


QUIZ  QUESTIONS  443 

153.  What  are  the  classes  of  unskilled  labor?  Un- 
der what  management  and  supervision  do  they  work 
most  successfully? 

CHAPTER  III 

154.  Define  wages.  Distinguish  between  real  and 
money  wages.  What  is  the  relation  of  wages  to  prices? 
How  does  this  explain  the  difference  in  country  and  city 
wages  ? 

155.  Does  the  Transvaal  afford  an  excellent  illus- 
tration of  the  influence  of  prices  upon  wages?  Why  is 
it  necessary  to  import  negroes  to  work  mines  in  the 
Transvaal? 

156.  How  do  fees  differ  from  wages? 

157.  What  fixes  the  rate  of  wages?  What  deter- 
mines the  lower  limit  of  the  rate  of  wages? 

158.  Upon  what  does  the  demand  for  labor  of  each 
class  depend?  What  influence  do  modern  systems  for 
cost  keeping  have  upon  efficiency? 

159.  How  does  the  condition  of  the  market  aff^ect  the 
demand  for  labor?  Show  how  competition  between  em- 
ployers acts  upon  the  demand  for  labor. 

160.  What  is  meant  by  the  supply  of  labor?  What 
is  the  chief  source  of  unskilled  labor  in  the  United 
States?  What  influence  has  this  fact  had  upon  immi- 
gration laws? 

161.  What  figures  are  given  concerning  the  number 
of  immigrants  in  the  United  States?  What  may  be 
said  for  the  average  immigrant?  Does  the  immigrant 
rise  in  the  ranks  of  skilled  labor? 

162.  What  factors  affect  the  supply  of  labor?  Illus- 
trate. What  is  the  relation  between  business  depres- 
sion and  deficiency  of  labor? 


444.  ECONOMICS 

163.  Upon  what  does  the  supply  of  labor  in  each 
class  depend?     Illustrate. 

164.  Give  the  qualifications  for  the  unskilled  labor- 
ers. Give  the  qualifications  for  a  good  section  hand 
on  a  railroad.  Give  the  qualifications  for  a  railway  en- 
gineer. Show  how  these  quahfications  influence  the 
supply  of  labor  in  each  class.  Show  their  relation  to 
the  profits  of  the  concern. 

165.  Give  the  qualifications  for  a  railway  traffic  man- 
ager. What  is  the  relation  of  salary  to  the  actual  value 
of  his  services? 

166.  What  has  been  the  career  of  most  railroad  pres- 
idents? 

CHAPTER  IV 

167.  What  is  meant  by  standard  rates  of  wages? 
What  is  the  effect  of  standard  rates  on  efficiency? 
What  would  be  the  ideal  method  of  paying  wages? 
Why  ?  How  are  the  fixed  expenses  per  unit  of  product 
ascertained? 

168.  Give  statistics  showing  loss  of  time  through 
idleness  in  any  factory.  What  is  the  best  way  to  rem- 
edy this?    Will  supervision  do  so? 

169.  What  are  the  three  systems  of  wage  payment 
calculated  to  increase  efficiency?  What  are  the  objec- 
tions to  profit-sharing? 

170.  Why  is  profit-sharing  unfair  to  the  employer? 

171.  In  what  kind  of  industries  does  the  piece  work 
system  operate  with  most  success?     Why? 

172.  What  is  the  serious  objection  to  piece  work? 
What  makes  this  system  unpopular  with  employes? 
What  often  gives  the  employe  an  unfair  advantage 
over  the  employer  under  the  piece  work  system? 


QUIZ  QUESTIONS  445 

173.  What  is  the  best  method  of  increasing  an  em- 
ploye's efficiency?  What  is  the  premium  system? 
Illustrate  the  difference  between  the  premium  system 
and  the  piece  work  system. 

174.  Show  how  the  premium  system  operates  upon 
the  introduction  of  new  methods. 

175.  What  is  the  effect  of  this  system  on  the  ma- 
chinery? How  have  improved  machine  methods  bet- 
tered the  condition  of  the  employe? 

176.  In  what  two  ways  does  the  risk  incurred  in  cer- 
tain operations  influence  the  supply  of  labor?  Illus- 
trate the  dangers  met  with  in  coal  mining.  What 
wages  should  the  miner  command? 

177.  What  is  the  effect  of  the  manufacture  of  bleach- 
ing powder  upon  the  laborer? 

178.  What  has  the  chance  of  success  to  do  with  the 
supply  of  labor?  Illustrate  the  effect  of  social  posi- 
tion on  the  supply  of  labor.  What  influence  does  an 
opportunity  for  advancement  have  upon  the  supply  of 
labor?  How  do  these  three  factors  affect  wages? 
What  is  the  effect  of  the  sole  or  partial  dependence  of 
labor  on  wages? 

179.  Do  women's  wages  illustrate  this  dependence  of 
labor  on  wages?  How  does  the  sweating  system  bear 
upon  the  matter?  What  other  factors  determine  the 
rate  of  wages  paid  to  women?  Why  do  women  teach- 
ers not  receive  the  same  wages  as  men? 

CHAPTER  V 

180.  Give  the  definition  of  and  purpose  of  the  trade 
union.  What  is  the  justification  for  the  trade  union? 
What  are  the  two  kinds  of  trade  unions?  Illustrate 
each. 


446  ECONOMICS 

181.  Show  the  resemblance  between  the  general 
scheme  of  organization  of  a  trade  union  and  our  polit- 
ical organizations.  What  does  the  jurisdiction  of  each 
branch  of  a  union  include?  Why  are  there  subdistrict 
unions? 

182.  What  is  the  relation  of  the  individual  member 
to  the  union?     Is  it  a  democratic  organization? 

183.  What  are  the  powers,  functions  and  proceedings 
of  a  convention  of  the  national  union? 

184.  According  to  the  preamble  of  the  Constitution 
of  the  United  Mine  Workers'  Organization,  what  is  the 
general  purpose  of  the  trade  union?  What  objects  are 
included  under  this  general  purpose? 

185.  What  is  the  endeavor  of  the  trade  union  in  re- 
gard to  the  wages  of  its  members?  Give  the  main 
provisions  of  an  agreement  between  employer  and  em- 
ployes as  settled  by  the  union.  What  is  the  legal  status 
of  the  unincorporated  trade  union?  Why  do  employers 
favor  the  method  of  collective  bargaining? 

186.  What  is  the  chief  concern  of  the  local  union? 
What  is  a  walking  delegate?  What  happens  if  the  lo- 
cal union  does  not  settle  the  matters  with  the  employer? 

187.  What  is  a  strike?  In  a  strike  what  is  the  first 
business  of  the  union?     How  is  it  accomplished? 

188.  What  is  meant  by  picketing  and  what  is  its  pur- 
pose?    Illustrate. 

189.  What  are  the  social  forces  brought  to  bear  on 
certain  cases  by  the  union?  What  term  of  reproach  has 
been  coined  by  the  union? 

190.  Give  an  illustration  of  the  ostracizing  power  of 
the  union?  What  forms  does  the  persecution  of  the 
"scab"  take? 

191.  Why  is  a  strike  a  powerful  weapon  in  the  hands 
of  the  union?     What  are  meant  by  defense  funds? 


QUIZ  QUESTIONS  447 

192.  What  is  the  success  of  the  strike  dependent  upon 
very  largely?  Under  the  system  of  competition,  what 
disadvantage  does  the  employer  face? 

193.  Under  a  system  of  competition  what  advantage 
does  the  union  take  of  the  employer?  In  the  absence 
of  competition  how  would  employers  be  inclined  to  act 
toward  the  union? 

194.  Why  is  common  action  among  employers  im- 
possible?    Why  is  combination  of  employers  desirable? 

195.  Why  is  collective  bargaining  a  better  method  of 
settling  difficulties  between  employe  and  employer  than 
the  strike?     Should  the  state  interfere  in  such  matters? 

196.  What  are  some  of  the  minor  activities  of  the 
trade  union?  In  what  way  do  they  restrict  the  supply 
of  labor? 

197.  What  is  the  employer's  attitude  toward  the 
closed  shop?  What  does  one  employer  say  of  the 
"closed  shop"? 

198.  What  constitutes  the  most  serious  indictment 
against  labor  organizations?  Give  illustration  of  the 
unreasonable  demands  of  a  union. 

199.  How  may  a  union  limit  the  output?  What  is 
the  union's  attitude  towards  labor-saving  machinery? 
What  defense  do  they  make  for  this  attitude?  What 
can  be  said  of  the  validity  of  this  defense? 

200.  Does  the  union  favor  the  best  method  of  in- 
creasing wages?  What  is  the  most  promising  field  for 
the  development  of  trade  unions?  Give  an  example  of 
what  has  been  done  here  in  this  field. 

CHAPTER  VI 

201.  Define  rent.  What  is  a  lease?  Give  examples 
of  the  different  kinds  of  leases. 


448  ECONOMICS 

202.  Give  the  various  forms  of  rent  payments.  Il- 
lustrate each.  On  what  basis  are  mineral  royalties 
fixed? 

203.  How  does  a  tenant  go  about  the  management  of 
a  farm?     What  sum  will  he  pay  as  rent? 

204.  What  are  the  primary  causes  determining  ag- 
ricultural rent?  What  beside  the  fertility  of  the  soil 
is  of  importance  in  determining  rent? 

205.  Show  the  influence  of  price  on  rent. 

206.  Why  does  land  in  the  neighborhood  of  large 
cities  command  large  rentals?  What  has  diminished 
the  importance  of  location  in  relation  to  rent? 

207.  What  determines  the  rent  of  mines?  Give  an 
example. 

208.  How  are  ground  rents  determined?  What  is 
the  value  of  land  used  for  building  purposes  based 
upon?  How  do  incomes  from  ground  rents  vary? 
Give  the  various  grades  of  ground  rentals.  In  the  lo- 
cation of  retail  stores  what  determines  rent? 

209.  How  does  the  opportunity  for  the  display  of 
goods  affect  the  rent?   , 

210.  Illustrate  the  effect  of  demand  for  commodities 
upon  location.  What  is  the  chief  principle  of  ground 
rents?  Give  an  illustration  from  a  New  York  suburb 
of  the  effect  of  location  upon  rent.  How  have  street 
railways  affected  ground  rents? 

211.  Are  building  rents  determined  on  the  same  prin- 
ciple as  ground  rents?  What  are  some  of  the  most 
important  factors  determining  building  rents? 

212.  What  is  the  economic  rent  of  a  piece  of  land? 
What  is  meant  by  "no-rent"  land? 


QUIZ  QUESTIONS  449 

CHAPTER  VII 

213.  To  what  extent  does  interest  figure  in  the  ex- 
pense aecounts  of  corporations? 

214.  Why  is  interest  paid? 

215.  What  must  the  borrower  have  before  he  can  get 
control  of  capital?  Define  interest.  Why  is  the  defi- 
nition giv^en  for  interest  not  correct  ?  What  does  a 
bank  lend  or  sell  to  its  depositors?     Illustrate. 

216.  What  is  the  business  of  banking?  What  defini- 
tion of  interest  covers  all  excesses?     Illustrate. 

217.  What  hold  does  the  creditor  have  upon  the 
debtor?  What  are  security  contracts?  What  part 
does  the  endorser  play  in  a  security  contract? 

218.  What  is  a  mortgage?  Illustrate  the  nature  of 
a  mortgage  grant.  What  is  its  advantage  to  the  cred- 
itor? 

219.  What  is  collateral  security?  How  is  the  busi- 
ness of  giving  collateral  or  mortgage  security  trans- 
acted? 

220.  How  is  the  discount  on  the  sale  of  promises  to 
pay  expressed?  What  are  the  two  general  classes  of 
loans?     Why  is  interest  low  on  call  loans? 

221.  What  are  short  time  commercial  loans?  By 
whom  are  most  of  these  short  time  and  commercial  loans 
offered?  In  what  two  forms  are  these  loans  made? 
Compare  the  English  system  of  loans  with  the  Amer- 
ican. 

222.  What  are  the  three  classes  of  long  time  loans? 
What  is  the  purpose  of  loans  on  real  estate  security? 
What  are  bonds?  How  is  the  interest  on  bonds  paid? 
What  is  the  expectation  of  the  corporation  issuirig  lx)nds 
in  regard  to  them?  Upon  what  does  the  term  of  a 
bond  depend? 

1—29 


450  ECONOMICS 

223.  What  are  public  bonds?  Why  are  they  issued? 
What  is  their  security?  What  happens  in  case  of  de- 
fault? 

224.  Who  purchases  long-term  obligations?  What 
is  the  object  of  the  investor?  Who  are  the  large  in- 
vestors in  the  United  States? 

225.  How  do  rates  of  interest  vary?  Upon  what 
does  the  rate  of  interest  paid  by  a  corporation  depend? 
Illustrate. 

226.  What  are  the  causes  determining  the  rate  of  in- 
terest? Illustrate.  How  are  these  graded  as  to  the 
preference  shown  them  by  investors?  How  does  de- 
mand aiFect  interest?  Why  has  the  interest  rate  on 
United  States  Government  bonds  been  decreasing? 

227.  What  are  the  causes  which  explain  the  difference 
in  the  desirability  in  the  various  classes  of  loans  ?  Why 
is  double-name  paper  better  than  single-name  paper? 
When  and  why  were  the  bonds  of  the  Pennsylvania 
Railroad  Company  more  secure  than  the  bonds  of  the 
United  States  Government?  What  is  the  standing  of 
bonds  of  mining  companies? 

228.  When  is  interest  low?  Illustrate.  What  is  the 
result  of  a  rise  in  prices  upon  interest? 

229.  What  effect  do  the  limitations  to  the  expansions 
of  bank  credit  have  upon  rates  of  interest?  What  is 
the  effect  upon  prices?  What  is  the  relation  of  rates 
of  interest  to  prices? 


CHAPTER  VIII 

230.  By  what  formula  may  the  profits  of  any  busi- 
ness be  calculated?  Why  are  profits  smaller  than  is 
commonly  supposed? 


QUIZ  QUESTIONS  461 

231.  What  does  the  farmer  consider  to  be  his  profits? 
Is  he  right?     What  is  true  of  profits  in  agriculture? 

232.  Are  manufacturing  and  railroad  profits  large 
or  small?     Why  is  this  so? 

233.  In  estimating  the  profits  of  a  business  what  fact 
is  ignored?  What  is  the  influence  of  competition  upon 
profits? 

234.  Illustrate  the  effect  of  growing  competition  on 
prices.  What  does  the  average  producer  consider  to  be 
his  running  expenses?  Why  is  he  unwilling  to  close 
down  his  plant? 

235.  What  testifies  to  the  fact  that  large  profits  may 
be  and  are  being  made  in  the  United  States?  What 
are  the  five  sources  of  profits? 

236.  How  have  most  great  American  fortunes  been 
made? 

237.  What  is  the  primary  reason  for  large  and  small 
profits?  Show  the  place  of  brains  in  business.  How 
did  the  Carnegie  Steel  Company  realize  large  profits? 

238.  What  are  the  advantages  of  the  Carnegie  Steel 
Company?  Why  did  the  concentration  of  their  mills 
give  the  Carnegie  Steel  Company  an  advantage? 

239.  What  was  the  policy  of  the  Carnegie  Steel  Com- 
pany as  to  equipment?  Upon  what  did  the  efficiency 
of  the  Carnegie  Steel  Company  depend?  How  did  the 
Carnegie  Steel  Company  get  control  of  the  market  and 
its  prices?    What  is  the  real  factor  in  business  success? 

240.  What  effect  has  extraordinary  demand  on 
profits?  Illustrate.  How  can  the  producer  take  ad- 
vantage of  the  fact  that  costs  of  production  do  not 
change  as  rapidly  as  prices  ? 

241.  What  is  meant  by  speculation?  How  is  it  car- 
ried on?  What  is  true  of  the  losses  in  comparison  with 
the  gains  through  speculation? 


452  ECONOMICS 

242.  What  is  the  surest  and  safest  way  to  earn  large 
profits?    What  is  monopoly  of  ability? 

243.  Illustrate  the  monopoly  of  large  industries. 
What  are  the  advantages  of  a  large  producer?  How 
do  monopoly  prices  differ  from  competitive  prices? 

244.  What  is  a  franchise?  Illustrate.  What  is  a 
patent  ? 

245.  How  is  a  monopoly  of  quality  obtained?  What 
part  does  advertising  play  in  building  up  a  monopoly? 
Why  is  this  form  of  monopoly  most  desirable? 

CHAPTER  IX 

246.  How  can  it  be  said  that  every  man,  woman  and 
child  in  the  United  States  pays  taxes?  What  are  the 
twofold  functions  of  government?  Give  examples  of 
tlie  inactive  functions  of  government.  What  are  the 
two  classes  of  service  included  imder  the  functions  of 
government  ?    Give  examples  of  each. 

247.  What  is  a  tax?  What  is  the  most  important 
significant  feature  of  a  tax? 

248.  What  is  the  basis  of  taxation? 

249.  What  are  the  maxims  of  taxation  ? 

250.  What  is  the  general  division  of  taxes?  How  is 
each  division  levied? 

251.  What  are  the  advantages  of  direct  taxation? 
What  are  the  disadvantages  of  direct  taxation? 

252.  What  are  the  advantages  of  indirect  taxation? 
What  are  the  disadvantages  of  indirect  taxation? 

253.  What  is  the  basis  of  the  general  property  tax? 
How  is  it  collected?  What  are  the  objections  to  the 
general  property  tax?  What  is  the  only  argument 
which  can  be  advanced  in  support  of  the  general  prop- 
erty tax?     How  may  it  be  somewhat  remedied? 


QUIZ  QUESTIONS  453 

254.  What  is  the  basis  of  the  income  tax?  What  are 
its  advantages?  What  are  the  objections  to  the  income 
tax?  What  has  been  the  history  of  the  income  tax  in 
the  United  States? 

255.  Who  has  been  the  most  prominent  advocate  of 
the  single  tax?    Upon  what  does  he  base  his  theory? 

256.  What  does  the  single  taxer  propose?  How  does 
he  expect  to  accomplish  this  purpose?  What  is  to  be- 
come of  the  other  fixed  taxes? 

257.  What  are  the  fiscal  objections  to  the  single  tax? 
Why  could  it  not  be  collected? 

258.  What  are  the  economic  objections  to  the  single 
tax?     Why  would  it  be  a  socialistic  measure? 

259.  Define  inheritance  tax?  What  are  the  justifi- 
cations for  an  inheritance  tax?  Upon  what  principle 
are  inheritance  taxes  levied  in  various  countries?  Why 
has  this  form  of  taxation  been  generally  employed  in 
the  United  States? 

260.  What  are  the  two  general  classes  of  indirect 
taxes?  What  are  the  three  methods  employed  in  ex- 
cise taxation?  Explain  the  workings  of  each?  Upon 
what  articles  should  excise  duties  be  levied? 

261.  What  are  customs?  What  is  the  purpose  of 
customs  duties?  Upon  what  principle  should  they  be 
levied?  Distinguish  between  specific  duty  and  an  ad 
valorem  duty . 

262.  What  would  be  the  ideal  system  of  taxation? 


4,54.  ECONOMICS 

PART  IV 

CHAPTER  I 

263.  What  is  the  importance  of  transportation? 

264.  What  forms  of  transportation  have  given  rise  to 
problems  in  their  growth?  What  was  the  first  railroad? 
When  did  the  process  of  "linear  consolidation"  take 
place?  What  was  the  period  of  expansion  of  railway 
mileage?  What  evils  resulted  from  railroad  compe- 
tition? What  has  characterized  the  period  up  to  the 
present  time? 

265.  What  two  points  must  be  borne  in  mind  in  order 
to  understand  the  real  nature  of  the  railroad  problem? 
What  is  gained  by  the  diminishing  expense  of  the  rail- 
road? 

266.  Why  does  selling  transportation  diifer  from 
selling  ordinary  commodities?  How  has  the  govern- 
ment made  possible  the  present  American  transporta- 
tion system?  Why  should  railroads  be  under  pubhc 
regulation?  What  two  regulations  does  the  state  place 
on  railroads? 

267.  Why  is  the  problem  of  discrimination  difficult 
to  settle?  What  are  the  three  kinds  of  discrimination? 
Who  is  the  man  usually  discriminated  against?  Why 
are  the  effects  of  discrimination  between  places  more 
far-reaching  than  discriminations  between  persons? 
Illustrate.  What  effect  does  discrimination  on  com- 
modities have  upon  industry?  As  a  rule  how  does  the 
traffic  manager  arrange  rates? 

268.  What  were  the  first  steps  in  railroad  legisla- 
tion? Why  were  they  ineffective?  What  lesson  had 
to  be  learned? 


QUIZ  QUESTIONS  455 

269.  What  was  the  first  act  of  Congress  in  reference 
to  raih'oads?  What  five  points  did  it  cover?  How 
were  the  provisions  of  the  law  to  be  enforced? 

270.  What  was  the  chief  eifect  of  the  Elkins  Law? 

271.  What  has  been  the  result  of  the  Hepburn  Act? 
What  problem  has  been  settled?  What  new  problem 
remains? 

272.  What  may  be  said  for  government  ownership 
of  railroads?  What  are  the  important  arguments  in 
favor  of  private  ownership? 

CHAPTER  II 

273.  What  is  the  permanent  basis  of  international 
trade?  Illustrate.  What  economic  variations  cause  a 
difference  in  the  output?  What  is  the  point  at  issue 
between  the  protectionists  and  the  free  trader? 

274.  What  are  the  two  types  of  tariff?  What  are 
the  objects  of  each  type? 

275.  How  does  a  protective  tariff  operate?  Under 
a  prohibitive  tariff  who  in  practice  pays  the  tax? 

276.  What  do  protectionists  admit  as  to  the  burden 
of  the  tax?  How  can  we  justify  the  attitude  of  the 
country  that  taxes  itself  at  an  early  date?  Why  is 
there  a  loss  sustained  at  first? 

277.  What  is  meant  by  dumping?  How  does  it  come 
about?  Is  it  permanent?  Give  an  illustration.  Is 
dumping  a  dead  issue? 

278.  Compare  the  steel  prices  in  England  and  in 
America?  What  would  very  probably  have  happened 
had  the  United  States  not  had  a  protective  tariff  ?  Why 
is  price-cutting  essential  to  dumping? 

279.  How  can  the  producer  afford  the  expense  of 
dumping?    Illustrate. 


456  ECONOMICS 

280.  What  is  the  significant  figure  in  the  expendi- 
tui'es  of  a  steel  mill? 

281.  What  effect  does  the  dumping  of  the  United 
States  Steel  Corporation  have  upon  English  producers? 
How  does  it  furnish  the  English  protectionist  his  sound- 
est argument? 

282.  What  prevents  dumping?  What  would  hap- 
pen if  the  tariff  law  were  removed  on  British  and  Ger- 
man steel?  What  circumstances  would  hamper  for- 
eign producers? 

283.  How  would  free  iron  and  steel  prove  an  un- 
disguised blessing  to  the  American  producer?  What 
solution  to  the  tariff  problem  has  been  suggested?  Is 
it  to  be  expected  that  the  United  States  will  abandon 
a  protective  system?  What  is  the  open  question  in  the 
tariff  agitation? 

284.  What  affect  have  the  high  tariffs  passed  at  the 
time  of  the  Civil  War  had  upon  our  industries?  Why 
does  the  American  producer  at  present  feel  the  need  for 
reciprocity? 

285  What  are  the  three  chief  types  of  tariff  systems  ? 
In  what  respects  is  the  German  system  a  satisfactory 
one?  Why  could  it  not  be  readily  introduced  into  the 
American  system  of  government?  What  system  seems 
best  suited  to  American  conditions?  Why  cannot  the 
tariff  problem  be  definitely  settled  for  all  time? 

CHAPTER  III 

286.  How  did  the  trust  movement  begin?  What  fol- 
lowed the  organization  of  the  Sugar  Trust?  Up  until 
1893  what  were  the  principal  combinations  listed  on  the 
New  York  Exchange? 

287.  From  what  year  does  the  real  trust  movement 


QUIZ  QUESTIONS  457 

date?  What  has  been  the  growth  of  the  trusts  in  the 
field  of  consumption  goods?  What  is  the  probable  ori- 
gin of  the  trust  movement?  What  were  the  financial 
and  industrial  conditions  after  the  panic  of  1893? 

288.  What  effect  did  the  return  of  prosperity  have 
upon  the  trusts?  Illustrate  the  rise  in  stocks.  What 
effect  did  this  have  upon  promotion? 

289.  What  is  the  function  of  the  promoter?  Why 
were  the  railroad  stocks  in  1898  no  longer  available? 
What  was  the  result  ?  What  was  the  new  outlet  for  in- 
vestment? During  the  times  of  depression  what  has 
competition  meant  to  the  producer? 

290.  What  attempts  had  been  made  before  1898  to 
lessen  the  recognized  evils  of  competition?  How  does 
the  pool  hope  to  secure  profitable  prices?  What  is  the 
relation  of  different  managements  to  the  pool? 

291.  What  is  the  essential  weakness  of  the  pool? 
Why  is  the  successful  management  of  a  pool  difficult 
during  a  period  of  business  depression?  Give  an  exam- 
ple. 

292.  In  a  trust  how  was  agreement  among  managers 
secured?  To  what  was  the  holder  of  trust  certificates 
entitled?  How  was  permanence  of  control  secured? 
How  did  the  trust  furnish  a  more  satisfactory  restric' 
tion  of  competition? 

293.  Why  could  not  the  details  of  trust  organiza- 
tions be  concealed?  What  legal  basis  was  there  for  the 
attacks  on  the  trusts?  What  was  the  first  suit  brought 
against  the  trust?  What  did  the  results  of  this  first  law- 
suit show?  How  did  the  power  of  the  state  to  revoke 
corporation  charters  affect  the  trust? 

294.  Before  1889  what  was  the  general  rule  as  to  the 
purpose  of  organized  corporations  ?  Upon  what  change 
in  this  purpose  did  the  future  of  this  trust  depend? 


458  ECONOMICS 

What  changes  need  be  made  in  the  organization? 
What  would  be  the  result?  Under  what  conditions 
could  the  holding  company  dissolve  corporations? 

295.  Did  the  holding  company  differ  in  principle 
from  the  illegal  trust?  What  legal  difficulty  confronted 
the  trust?    How  was  it  overcome? 

296.  What  were  the  provisions  of  the  Corporation 
Law  of  New  Jersey?  What  were  the  consequences  of 
this  statute? 

297.  How  was  the  legal  position  of  the  holding  com- 
pany finally  established?  What  was  the  decision  of  the 
court  as  to  the  Sherman  Act?  What  was  proved  to  be 
the  solution  of  the  trust  problem?  How  was  it  legally 
protected? 

298.  How  did  the  advantages  of  combination  come 
to  be  generally  recognized?  What  was  the  result  of 
this  favorable  attitude  toward  the  trust?  What  is  the 
kernel  of  the  so-called  trust  problem? 

299.  What  are  the  unfair  advantages  of  the  trust? 
What  has  been  one  of  the  biggest  factors  in  the  past  in 
hastening  centralization  in  industry?  What  examples 
are  there? 

300.  What  evidence  has  been  given  as  to  discrimina- 
tion in  prices?  What  information  did  the  industrial 
commission  secure  as  to  discrimination  in  local  markets? 
What  are  the  probable  causes  of  these  variations  in 
price? 

301 .  How  do  the  trusts  boycott  the  products  of  other 
producers?     Give  example. 

302.  What  is  the  basis  of  popular  antagonism  to- 
ward trusts?  What  does  Professor  Jenks  conclude  as 
to  trust  prices?  What  effect  have  the  trusts  had  upon 
the  passage  of  tariff  bills?  What  has  public  opinion 
forced  the  trusts  to  do  in  order  to  prevent  the  corrup- 


QUIZ  QUESTIONS  459 

tion  of  public  officials?     What  influence  have  the  rail- 
roads in  pohtics? 

303.  What  eifect  has  stock  manipulation  on  public 
welfare?  Why  cannot  the  investing  public  gain  ade- 
quate knowledge  as  to  what  will  be  a  safe  investment? 
How  do  stock  manipulations  affect  the  small  investor? 
How  is  a  fictitious  value  given  to  stock? 

304.  What  were  the  first  anti-trust  laws?  What  was 
the  decision  of  the  United  States  Supreme  Court  as  to 
these  laws?    How  did  the  state  fare? 

305.  What  does  the  Sherman  Antitrust  Act  de- 
clare? 

300.  To  what  cases  has  this  law  been  mainly  applied? 
Why  has  it  failed?  What  is  interstate  commerce  as 
interpreted  by  the  United  States  Supreme  Court? 
How  does  the  trust  escape  both  state  and  federal  juris- 
diction? Why  are  the  state  governments  powerless  in 
controlling  the  trusts?  How  can  any  state  action  be 
rendered  useless? 

307.  What  is  the  aim  of  corporation  control  at  pres- 
ent? How  is  this  to  be  brought  about?  Who  is  at  the 
head  of  the  Bureau  of  Corporations  at  present?  What 
are  his  powers  ? 

308.  In  what  three  ways  may  the  trust  problem  be 
solved  ? 

CHAPTER  IV 

309.  Is  the  problem  of  monopoly  identical  with  that 
of  the  trust?  Which  is  the  broader  term?  How  is 
monopoly  represented  in  the  popular  mind?  What  is 
the  view  of  certain  economists  as  to  monopoly? 

310.  What  is  the  opposing  view  as  to  monopoly?  Il- 
lustrate. 


460  ECONOMICS 

311.  Show  how  progress  results  in  monopoly?  How 
should  the  social  surplus  be  divided?  How  does  the 
present  social  surplus  afford  a  monopoly  fund?  Illus- 
trate the  fact  that  a  monopoly  is  never  destroyed. 
What  conclusion  can  be  drawn  as  to  the  extent  of 
monopoly  power? 

312.  What  is  the  real  nature  of  the  monopoly  prob- 
lem? Illustrate.  How  does  monopoly  take  advantage 
of  the  variation  in  social  income? 

313.  How  would  you  apportion  the  social  surplus? 
How  do  some  propose  to  regulate  wages? 

314.  What  are  the  objections  to  government  regula- 
tion of  prices?  What  are  the  four  classes  of  property 
that  can  claim  a  large  share  of  the  social  surplus? 
Wliat  should  be  the  aim  of  those  who  wish  to  reform 
monopoly  power? 

315.  What  are  the  limitations  of  monopoly  power? 
Why  should  the  trust  movement  of  recent  years  be 
considered  a  social  gain?  What  effect  has  the  growth 
of  industrial  combination  had  upon  monopoly  power? 

316.  What  safeguard  has  the  consumer  against  the 
power  of  monopoly?  Illustrate.  How  may  the  trust 
movement  be  considered  socialistic?  In  what  way  may 
the  consumers  be  compensated  for  the  loss  of  their  free 
income  ? 

317.  What  is  the  solution  of  the  monopoly  problem? 
Illustrate  its  working  out. 

318.  What  is  meant  by  the  power  of  substitution? 
Explain  the  sympathetic  movement  of  prices.  What 
effect  does  this  movement  have  upon  monopoly  power. 
Illustrate. 

319.  Why  cannot  the  Standard  Oil  Company  exer- 
cise its  monopoly  power  to  the  fullest  extent?     In  what 


QUIZ  QUESTIONS  461 

way  did  the  power  of  substitution  affect  the   Beef 
Trust? 

320.  How  may  social  welfare  compel  government 
regulation  of  prices? 

CHAPTER  V 

321.  Upon  what  does  the  existence  of  social  unrest 
depend?  What  social  problems  has  this  nation  to  face? 
What  is  the  strength  of  the  socialist  party  in  this  coun- 
try? 

322.  What  five  objections  does  the  socialist  make  to 
the  present  order  of  things?  What  does  the  socialist 
mean  by  exploitation?  What  is  its  cause?  How  does 
socialism  deal  with  monopoly  power? 

323.  What  criticism  does  the  socialist  make  of  the 
present  nature  of  society? 

324.  In  what  way  is  the  wastefulness  of  modem  so- 
ciety displayed? 

325.  What  evils  spring  from  competition? 

326.  What  is  the  socialistic  program?  What  results 
would  it  bring  about?  What  would  be  the  benefits  to 
the  individual?  What  would  be  the  relation  of  the 
individual  to  the  government?  To  what  extent  does  so- 
cialism attack  the  institution  of  private  property? 

327.  What  is  the  relation  of  socialism  and  the  single 
tax?  Upon  what  does  the  socialist  base  his  belief  in  the 
single  tax? 

328.  What  would  the  institution  of  socialistic  govern- 
ment require?  What  does  H.  G.  Wells  consider  the 
necessary  antecedent  to  the  adoption  of  socialism? 
What  course  is  open  to  socialists  at  present  ? 

329.  What  is  the  tendency  in  modern  opposing 
schools  of  thought?     What  has  caused  the  change  in  the 


46^  ECONOMICS 

socialist  attitude?  What  features  in  modern  industrial 
life  show  the  progress  from  the  old  laissez  f aire  theory 
of  goverimient?  What  will  very  probably  be  the  next 
step  toward  the  realization  of  a  socialistic  program? 

330.  Has  socialism  abandoned  some  of  its  old  tradi- 
tions?    Illustrate. 

331.  Does  the  modem  socialist  believe  in  a  democ- 
racy? What  is  the  future  of  the  whole  socialist  move- 
ment? What  is  the  weakness  of  socialism  as  an  imme- 
diate and  practical  line  of  action? 


CHAPTER  VI 

332.  What  two  conflicting  points  of  view  constitute 
the  labor  problem? 

333.  What  fact  about  the  union  must  be  realized  be- 
fore taking  up  a  discussion  of  the  labor  movement? 
What  are  the  aims  of  the  union?  When  wages  are  re- 
duced to  the  mere  cost  of  production,  what  fact  is  ig- 
nored? What  has  the  union  to  combat?  What  would 
be  the  result  of  a  free  competitive  system  in  the  labor 
market?     Illustrate. 

334.  What  kind  of  bargainer  is  the  single-handed 
wage  earner?     Why? 

335.  What  two  sacred  rights  clash  in  carrying  out  the 
closed  shop  policy? 

336.  What  is  the  boycott?  What  forms  may  the 
boycott  take?  What  may  be  considered  legal  forms 
of  the  boycott?  How  has  objection  to  the  boycott  shown 
itself? 

337.  What  justification  is  there  for  objection  to  the 
introduction  of  new  machinery? 

338.  What  efforts  have  been  made  to  restrict  trade 


QUIZ  QUESTIONS  463 

unions?  What  is  an  injunction?  Why  is  it  effective? 
What  limits  the  punishment  for  offenses  against  in- 
junctions? Upon  what  does  the  power  of  the  union 
rest?  How  has  the  injunction  curtailed  this  power? 
How  have  employers  curbed  the  power  of  the  union? 
Give  an  example. 

339.  What  are  the  objections  to  strikes  and  lockouts? 
What  four  schemes  for  settling  industrial  disputes  have 
been  proposed?  Why  is  the  collective  bargain  method 
ideal?  Why  is  the  "arbitration  board"  method  less  sat- 
isfactory? What  is  the  justification  for  compulsory 
arbitration  ?  Upon  what  does  the  proper  solution  of  the 
labor  problem  depend? 


INDEX 


Ability,  as  source  of  profits,  291-293. 
Agriculture,  18. 
Alvord,  J.  W.,  75. 
American  exports,  175-176. 
American    Merchant   Marine, 
Arbitration,  425. 
Archbold,  367. 

Articles  of  copartnership,  184. 
Asset     currency,     see     Bank 
issues. 


175. 


note 


Baldwin  Locomotive  Works,  47,  210. 

Apprentice  system  of,  48-49. 
Bank,  134. 

Directors  of,  144. 
Bank  credit. 

Basis  of,  141. 

Limitations  of,  140,  285. 
Bank  of  England,  145. 
Bank  of  France,  145-146. 
Bank  note  issues. 

On  security  of  bank  assets,  147. 

Protection  of,   146-147. 
Barter,  121. 
Beef  Trust,  391. 
Bills  of  exchange. 

Causes   influencing  price  of,  177- 
181. 
Bimetallism,  128-130. 
"  Black  list,"  413. 
Blackstone,  2,  3. 
Blanc,  Louis,  11. 
Bleaching  powder. 

Manufacture  of,  227-232. 


Bonds, 

Corporate,  375-277. 

Public,  377. 
Boss, 

Duty  of,  199. 
Boycott,  418-419. 

Brotherhood    of    Locomotive    Engi- 
neers, 252-253. 
Buffalo  Street  Railways,  24. 
Bullion,  see  Gold. 
Bullock,  C.  J.,  77-79,  116-119,  313- 

314,  337. 
Bureau  of  Corporations,  377. 
Business, 

Demand  for  university  men,  45. 

Importance  of  training  for,  43. 
Business  Organization, 

Class  in,  46. 


Cabet,  11. 
Capital, 

Agent  of  production,  17,  19. 

Consumption  of,  76. 

Definition  of,  64. 

Maintenance  of,  72-74. 

Service  in  production,  65-67. 
Capital  goods,  65. 
Capitalistic  production. 

Indirect,  67-68. 

Superior  to  direct  production,  68- 
7L 
Carlton,  Frank  J.,  40-41. 
Carnegie,  Andrew,  381. 
Carnegie  Steel  Company,  113,  291. 
Chicago  Board  of  Trade,  159. 

Account  of  transaction  in  wheat, 
160. 


465 


466 


INDEX 


Child  labor, 

Indirect  efiFects  of,  54. 
Inefficient  and   uneconomical,  55- 

56. 
Interest  in,  405. 
Moral  and  physical  eflfects  of,  53- 

54. 
Problem  of,  52-56. 
Citizens'  Industrial  Association,  422. 
Clearing  House,  137-139. 
Climate, 

Influence  on  industry,   101. 
Closed  shop. 
Employers'  attitude  toward,  249. 
Fallacy  of,  249-250. 
Policy  of,  417. 
Coal, 
Compared  with  coke,  107-108. 
Mining,  dangers  of,  236-227. 
Pennsylvania  fields,  424. 
Slav  invasion  of  anthracite  mines, 

416. 
Source  of  power,  22,  23. 
Coke,  see  Coal. 
Collateral  loans,  273. 
Collective  bargaining,  423. 
Colorado  Fuel  and  Iron  Company, 

32. 
Commodities  used  as  media  of  ex- 
change, 123. 
Communism,  9. 
Competition, 
Combination  of  employers  impos- 
sible imder,  247. 
Labor,  416. 

Restricted  by  trusts,  358. 
Comptroller  of  the  Currency,  142. 
Conciliation,  423. 
Consumers'  League,  419. 
Consumption, 

Forms  of,  77-79. 
Consumption   goods,   65. 

Affected  by  trust  movement,  350. 
Continuous  processes,  see  Division  of 
labor. 
Advantages  of,  84. 
Copartnership,  articles  of,  184. 
Cornell,  42. 


Corporation, 

Advantages  of,  187-188. 

Control  of,  188. 

Limited  liability  of,   188-189. 

Powers  of,  187. 
Corporation  charter,  187. 
Corporation    Law   of    New   Jersey, 

362-363. 
Costs,  154. 
Credit, 

Definition  of,  133. 

Forms  of,  133-134. 

Funds,  139-140. 

Instruments,  140. 
Customs  duties,  see  Taxes. 


Demand, 

Factors  influencing,  162-163. 

A  source  of  profits,  295-296. 
Depreciation,  74. 
DeQuincey,  149. 
Discrimination,  367. 
Division  of  labor,  81-99. 

Advantages  of,  84. 

Economies    effected  by,   92-94. 

Illustration  from  woolen  mill,  81- 
83. 

Increased    efficiency    through,   84- 
88. 
Dodge,  J.  M.,  41. 
Double  standard,  129-130. 
Dumping, 

Evils  of,  338-339. 

Present  problems,  339-340. 

Prevented  by  tariff  wall,  343-344. 


Economics, 

Definition  of,  1-2. 
Economic  goods,  1. 
Electricity,  102. 
Elkins  Law,  327-328. 
Ellis,  George  H.,  249. 
Eminent  domain,  6. 

Employers'  associations,  421-422. 


J 


INDEX 


467 


Engels,  404. 
Entrepreneur,  182-183. 
Exchange, 

An  offsetting  of  credits,  173-174. 

Essential  elements  of,  173. 
Excise,  see  Taxes. 

Reasons  for,  120-122. 
Exports,  175-176. 


Fees, 

Distinguished  from  taxes,  304. 

Distinguished    from    wages,    204- 
205. 
Fetter,  Frank  A.,  371. 
Financial  Review,  351-352,  355. 
Foreign  exchange,  169-181. 
Form  utility,  14-16. 
Franchise,  form  of  monopoly,  300. 
Free  goods. 

Transformation  of,  20. 
Free  trade. 

Argument  for,  336-338,  344. 


G 


General  property  tax,  see  Taxes. 
George,  Henry,  310. 
Gide,  Charles,  164-165. 
Gold, 

Export  of,  169. 

International  medium  of  exchange, 
169. 

Uses  of,  139. 
Goscben,  Lord,  177-181. 
Government, 

Functions  of,  303-304. 

Guarantees,  basis  of  public  con- 
fidence in,  127. 
Great   Northern   Railroad,  255. 

H 

Hepburn  Act,  328. 
Ilillquit,  Morris,  402. 


Holding  Company,  see  Trusts. 
Hurd,  R.  M.,  263. 


Illinois  Steel  Company,  32. 
Immigration,  208-209. 
Income  tax,  309-310. 
Inconvertible  paper,  130-131. 
Individualism,  397. 
Industrial  betterment,  30-38. 
Child  labor  laws,  35-37. 
Extra-business    relations    between 
employers  and  employes,  37-38. 
Factory  legislation,  34-35. 
Safe    and   sanitary    surroundings, 

31. 
Views  of  a  work's   manager,  33- 
34. 
Industrial  combinations,   growth  of, 

386. 
Industrial  Commission,  367. 
Industrial  income. 
Claimants  to,  191-192. 
Distribution  of,  189-191. 
Industry, 
Average     individual     output     in 

manufacturing,  120. 
Problem  of  women  in,  60-62. 
Standardization  of,  57. 
Transference  to  factories  of  home, 

58-60. 
Women  in,  56-62. 
Inglis,  H.  D.,  7. 
Inheritance  tax,  see  Taxes. 
Interest, 
Causes  determining  rates  of,  279- 

282. 
Change  in  rate  of,  283. 
Definition  of,  269. 
Identity  with  discount,  271. 
Rates  on  loans,  278. 
International    Association    of    Ma- 
chinists, 247. 
International  exchange,   169-181. 
Aggregate  amount  in  1907,  169. 
Process    similar    to    domestic   ex- 
change, 171. 


468 


INDEX 


International  income   account,  176- 

177. 
International    trade,   basis  of,   332- 

333. 
Interstate  Commerce  Act,  326. 
Interstate     Commerce    Commission, 

328-331. 
Investors,  277-278. 


J 


Jevons,  Stanley,  165. 
Johnson,  Alvin  S.,  151-152. 
Johnson,  Joseph  French,   148,   155- 
159. 

K 

Kirby,  John,  Jr.,  422. 
Knapp,  Judge,  331. 


Labor, 

Agent  of  production,  17/ 

Analysis  of,  28-29. 

Boycott,  418. 

Classes  of,  200-202. 

Competitive  system,  416. 

Demand  for,  206-208. 

Division  of,  81-99. 

Effect    of   machine    industry,    46, 
89. 

Efficiency  of,  29. 

Mental  efficiency  of,  39-50. 

Movement  in  America,  414. 

Moral  efficiency  of,  50-51. 

Problems  of,  413-425. 

Subdivision  of,   56. 

Supply  of,  208-211,  226. 
Labor-saving  machinery,  251-252. 
Laissez  faire,  404. 
Large-scale  production. 

Advantages  of,  113,  341-342. 

Causes  of  development,  115-116. 

Compared    with    small-scale    pro- 
duction, 109-110,  114-115. 

Economies  of,  112,  117-119. 


Loans, 

Basis  of  classification,  282-283. 

Classes  of,  274. 

Collateral,  273. 

Long  time,  275-278. 

Mortgages,  272. 

Real  estate,  275. 

Short  time  commercial,  274. 
Location  of  industry. 

Changes  in,  105. 

Determining  influences,  100-104. 

Pittsburgh  as  example,  106-107. 

M 

Machinery, 
Advantages  of  improved,  224-225. 
Labor-saving,  opposition  to,  251- 
252,  419. 
Man, 

Agent  of  production,  18. 
Comparison  of  primitive  and  civ- 
ilized, 63-64. 
Manager, 
Compared    with    organizer,     196- 

197. 
Duty  and  training  of,  197-199. 
Railway  traffic,  212. 
Manufacturers,     National     Associa- 
tion of,  422. 
Marx,  Karl,  404. 

Massachusetts  and  industrial  better- 
ment, 31. 
Medium  of  Exchange,  definition  of, 

122-123. 
Mill,    J.     S.,    9-12,    28-29,    149-150, 

153-154,  267. 
Money, 
Commodity,  134. 
Functions  of,  122-123. 
Kinds  of  American,  125-126. 
System,  125. 
Monopoly, 
Accompanies  progress,  381. 
Consimiers'     safeguards     against, 

387. 
Fund,  382. 
Kinds  of,  299-302. 
Limitations  on  power  of,  386. 


INDEX 


469 


Monopoly — (Continued) . 

Nature  of,  379-380. 

Power  of  substitution,  389. 

Social  welfare,  392. 

Standard  Oil  Company,  390. 
Moravians,  11. 
Mortgages,  272. 

N 

National  Banking  Law,  142,   147. 
National  banks,  142. 

Reserves  of,   144. 
Natural  resources,  source  of  profits, 

291. 
Nature, 

As  agent  of  production,  17-18. 

Latent  powers  of,  22. 


Organizer,  193-196. 
Ostracism,  242-244. 
Outerbridge,  A.    E.,  Jr.,  33-34,  96, 

217,  223-225. 
Over-production,  365. 
Owen,  Robert,  11. 


Pace  maker,  200. 

Panama  Canal  Company,   136. 

Paper  certificates,  126-127. 

Civil  War  issues,  132. 
Pareto,  M.  V.,  165. 
Partners, 

Kinds  of,  184. 

limitations  on  authority,  186. 

Obligations  of,  185-186. 
Partnerships,  183-187. 
Pennsylvania  Railroad,  189. 
Phila.  and   Reading  Coal  and   Iron 

Co.,  190-191,  201,  254,  269. 
Physiocrats,  18. 
Picketing,  241. 
Piece  work,  199-200,  220-221. 
Pittsburgh,  wages  in,  414. 
Place  utility,  14-16. 
Pool,  356-357. 


Possession  utility,  16-17. 
Premium  system,  222-224. 
Price  level,  156. 

EflFects    of   change   in,    158-159. 
Prices, 

As   exchange  relations,   165. 

Discrimination  in,  367-369. 

Factors  which  influence,  159-162. 

Government    regulation    of,    385- 
386. 
Production, 

Changes  required  by,  21-22. 

Contributions  of  nature  to,  25-27. 

Place  of  mind  in,  4t). 

Primary  elements  in,  63. 

Service  of  capital  in,  65-67. 

Union  of  three  factors  of,  182. 
Production  of  wealth,  14-15. 

Agents  of,   17. 

Forms  of,  14. 
Profits,  154,  286-290. 

Source  of  profits,  290-302. 
Profit  sharing,   218-220. 
Property,  2. 

Effects  on  individuals  of,  7. 

Right  of,  4-7,  9-10. 
Protection, 

Theory  of,  335-336. 
Protective  tariff. 

Definition,  334. 

Operation  of,  334-335. 


R 


Railroad, 

Forms  of  monopoly,  321-322. 

Quasi-public  in  nature,  322-323. 
Railroad  legislation,  325. 
Railroad  problem,  320-3.'n. 
Railway      president,      qualifications 

for,  212-214. 
Rapp,  11. 

Real  estate  loans,  275. 
Rent, 

Agricultural,  257-263. 

Building,  265-266. 

Definition  of,  254. 

Economic,  266-268. 


470 


INDEX 


Rent — {Contin  ued) . 

Forms  of  payment,  355. 
Ground,  262-265. 
Ricardo,  David,  267-268. 


Saving, 

Definition  of,  71. 

Forms  of,  72. 

Illustrations  of,  71-73. 
Scab,  242-243. 
School    of    Commerce,    New    York 

Uni^'ersity,  46. 
Seager,    H.    R.,    35-37,    68-69,    299, 

315-317,  329-331,  336. 
Securities,  corporation,  387. 
Sherman  Anti-Trust  Law,  363,  374. 

Failure  of,  375-377. 
Short  time  loans,  274. 
Single  tax, 

Economic  objection  to,  313. 

Fiscal  objections  to,  312-313. 

Proposition  of,  311-312. 

Socialistic  features,  400. 
Smith,  Adam,  18,  83-84,  85-88. 
Socialism,  9,  395-412. 

Apportionment  of  Siu^Ius,  S84. 

Growth  of,  395. 

Program,  398-400. 

Social  surplus,  381-382. 

Weakness  of,  407. 
Spargo,  John,  405. 
Specialization,  88-89. 

Advantages  of,  91-93. 

Evil  effects  of,  94. 

Influence  on  location  of  industry, 
104. 
Speculation,  296-298. 
Spencer,  Herbert,  404. 
Standard  Oil  Company,  349. 
Stevens  Institute,  42. 
Stock  manipulation,  372-374. 
Strikes,  240-245,  248. 

Compulsory  arbitration,  425. 

Picketing  in  strikes,  241. 
Sweating  evil,  405. 
Sweat  shop,  230. 


Tariff  problem. 

Need  of  reciprocity,  346-347. 

Possible  solutions,  347-348. 
Taxation, 

Advantages  of  direct  and  indirect, 
306-307. 

Basis  of,  305. 

Forms  of,  306. 

Ideal  system  of,  318-319. 

Maxims  of,  305-306. 

Right  of,  6. 
Taxes, 

Customs  of,  317-318. 

Excise,  317. 

General   property   tax,  307-308. 

Income,  309-310. 

Inheritance,  314-316. 
Time  utility,  16. 
Trade  agreements,  236-239,  423. 
Trade  unions,  see  Labor. 

Aims  of,  414. 

Characteristics   of,  249-252. 

Definition  of,  232. 

Efforts  to  restrict,  420. 

Injunctions,  420. 

Kinds  of,  232-234. 
Training, 

Importance  in  business  of,  43. 

Importance  of  technical,  40. 

Money  value  of,  41. 

Of  shop  superintendents,  49. 
Transportation,  320-321. 
Trust  legislation,  374. 
Trust  movement. 

Beginning  of,  349-350. 

In  relation  to  promoter,  353-356. 

In  relation  to  prosperity,  352-353. 
Trust  problem,   349-378. 
Trusts, 

Economics  of,  365. 

Evolution  of,  356-360. 

Gains  to  producer,  387. 

Organization  of  holding  company, 
360-364. 


INDEX 


471 


popular  hostility   based   on,  370- 

371. 
Unfair  advantages,  366-370. 


U 


Unit  of  value,  125. 

United   Mine  Workers  of  America, 

231,  250. 
National  Convention  of,  235-236. 
United  Shoe  Machinery  Co.,  112. 
United  States  Census  Bureau,  64. 
United     States     Steel     Corporation, 

255,  297,  342. 
United  Typothetae  of  America,  249. 

utmty. 

Classes  of,  14-17. 
Marginal,    150. 
Usefulness,  13. 
What  constitutes  economic,  79-80. 


Value,  149-152. 

Expressed  in  money,  152-153. 
Vauclain,  S.  M.,  47. 


W 

Wage  payment,  based  on  efficiency, 
215. 
Systems  calculated  to  increase  ef- 
ficiency, 218-224. 
Wages, 
Distinction     between      real     and 

money,  203. 
How  determined,  205-206. 
Paid  to  women,  230-231. 
Pittsburgh,  414". 
Walker,  Francis  A.,  9. 
War,    expense    of,    see    Production, 

forms  of. 
Warne,  Frank  J.,  233-236,  240-244, 

248,  415. 
Wealth, 

Definition  of,  1-9. 
Aggregate  in  U.  S.,  64-65. 
Welfare  work,  30. 
Wells,   H.   G.,  400,   406,  407. 
White  List,  Consumers'  League,  419. 
Women, 

In  industry,  56-60,  405. 
Problem    of    women    in    industry, 

60-62. 
Rate   of   wages,  405. 
Wood,  S.  T.,  227-228. 
Wool,  National  Association  of  Man- 
ufacturers, 391. 


r 


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